UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 1-10110

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

BANK BILBAO VIZCAYA ARGENTARIA, S.A.

(Translation of Registrant’s name into English)

Kingdom of Spain

(Jurisdiction of incorporation or organization)

Calle Azul, 4

28050 Madrid

Spain

(Address of principal executive offices)

Ricardo Gómez Barredo

Calle Azul, 4

28050 Madrid

Spain

Telephone number +34 91 537 7000

Fax number +34 91 537 6766

(Name, Telephone, E-mail and /or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of Each Class	Name of Each Exchange on which Registered
American Depositary Shares, each representing the right to receive one ordinary share, par value €0.49 per share	New York Stock Exchange
Ordinary shares, par value €0.49 per share	New York Stock Exchange*
Guarantee of Non-Cumulative Guaranteed Preferred Securities, Series C, liquidation preference $1,000 each, of BBVA International Preferred, S.A. Unipersonal	New York Stock Exchange**
3.000% Fixed Rate Senior Notes due 2020	New York Stock Exchange

* The ordinary shares are not listed for trading, but are listed only in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.

** The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-Cumulative Guaranteed Preferred Securities of BBVA International Preferred, S.A. Unipersonal (a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.).

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

The number of outstanding shares of each class of stock of the Registrant as of December 31, 2016, was:

Ordinary shares, par value €0.49 per share—6,566,615,242

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ☒    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer  ☒ Accelerated filer  ☐ Non-accelerated filer  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ☐ International Financial Reporting Standards as Issued by the International Accounting Standards Board  ☒ Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐    No  ☒

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

TABLE OF CONTENTS

		PAGE
PART I
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		7
A.	Directors and Senior Management		7
B.	Advisers		7
C.	Auditors		7
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		7
ITEM 3.	KEY INFORMATION		8
A.	Selected Consolidated Financial Data		8
B.	Capitalization and Indebtedness		11
C.	Reasons for the Offer and Use of Proceeds		11
D.	Risk Factors		11
ITEM 4.	INFORMATION ON THE COMPANY		33
A.	History and Development of the Company		33
B.	Business Overview		36
C.	Organizational Structure		65
D.	Property, Plants and Equipment		65
E.	Selected Statistical Information		66
F.	Competition		87
G.	Cybersecurity and Fraud Management		90
ITEM 4A.	UNRESOLVED STAFF COMMENTS		90
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		90
A.	Operating Results		96
B.	Liquidity and Capital Resources		146
C.	Research and Development, Patents and Licenses, etc.		151
D.	Trend Information		151
E.	Off-Balance Sheet Arrangements		154
F.	Tabular Disclosure of Contractual Obligations		155
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		155
A.	Directors and Senior Management		155
B.	Compensation		163
C.	Board Practices		172
D.	Employees		180
E.	Share Ownership		183
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		184
A.	Major Shareholders		184
B.	Related Party Transactions		184
C.	Interests of Experts and Counsel		186
ITEM 8.	FINANCIAL INFORMATION		186
A.	Consolidated Statements and Other Financial Information		186
B.	Significant Changes		188
ITEM 9.	THE OFFER AND LISTING		188
A.	Offer and Listing Details		188
B.	Plan of Distribution		195
C.	Markets		195
D.	Selling Shareholders		196
E.	Dilution		196
F.	Expenses of the Issue		196
ITEM 10.	ADDITIONAL INFORMATION		196
A.	Share Capital		196

		PAGE
B.	Memorandum and Articles of Association		196
C.	Material Contracts		199
D.	Exchange Controls		199
E.	Taxation		200
F.	Dividends and Paying Agents		206
G.	Statement by Experts		206
H.	Documents on Display		207
I.	Subsidiary Information		207
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		208
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		216
A.	Debt Securities		216
B.	Warrants and Rights		216
C.	Other Securities		216
D.	American Depositary Shares		216
PART II
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		218
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		218
ITEM 15.	CONTROLS AND PROCEDURES		218
ITEM 16.	[RESERVED]		220
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT		220
ITEM 16B.	CODE OF ETHICS		220
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		221
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		222
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		222
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		222
ITEM 16G.	CORPORATE GOVERNANCE		223
ITEM 16H.	MINE SAFETY DISCLOSURE		225
PART III
ITEM 17.	FINANCIAL STATEMENTS		225
ITEM 18.	FINANCIAL STATEMENTS		225
ITEM 19.	EXHIBITS		225

2

CERTAIN TERMS AND CONVENTIONS

The terms below are used as follows throughout this report:

• “BBVA”, the “Bank”, the “Company”, the “Group” or the “BBVA Group” means Banco Bilbao Vizcaya Argentaria, S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

• “BBVA Bancomer” means Grupo Financiero BBVA Bancomer, S.A. de C.V. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

• “BBVA Compass” means BBVA Compass Bancshares, Inc. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

• “Consolidated Financial Statements” means our audited consolidated financial statements as of and for the years ended December 31, 2016, 2015 and 2014 prepared in accordance with the International Financial Reporting Standards adopted by the European Union (“EU-IFRS”) required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

• “Latin America” refers to Mexico and the countries in which we operate in South America and Central America.

First person personal pronouns used in this report, such as “we”, “us”, or “our”, mean BBVA, unless otherwise indicated or the context otherwise requires.

In this report, “$”, “U.S. dollars”, and “dollars” refer to United States Dollars and “€” and “euro” refer to Euro.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include words such as “believe”, “expect”, “estimate”, “project”, “anticipate”, “should”, “intend”, “probability”, “risk”, “VaR”, “target”, “goal”, “objective” and similar expressions or variations on such expressions and includes statements regarding future growth rates. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. The accompanying information in this Annual Report, including, without limitation, the information under the items listed below, identifies important factors that could cause such differences:

• “Item 3. Key Information—Risk Factors”;

• “Item 4. Information on the Company”;

• “Item 5. Operating and Financial Review and Prospects”; and

• “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Other important factors that could cause actual results to differ materially from those in forward-looking statements include, among others:

• general political, economic and business conditions in Spain, the European Union (“EU”), Latin America, Turkey, the United States and other regions, countries or territories in which we operate;

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• changes in applicable laws and regulations, including increased capital and provision requirements and taxation, and steps taken towards achieving an EU fiscal and banking union;

• the monetary, interest rate and other policies of central banks in the EU, Spain, the United States, Mexico, Turkey and elsewhere;

• changes or volatility in interest rates, foreign exchange rates (including the euro to U.S. dollar exchange rate), asset prices, equity markets, commodity prices, inflation or deflation;

• ongoing market adjustments in the real estate sectors in Spain, Mexico and the United States;

• the effects of competition in the markets in which we operate, which may be influenced by regulation or deregulation;

• changes in consumer spending and savings habits, including changes in government policies which may influence spending, saving and investment decisions;

• adverse developments in emerging countries, in particular Latin America and Turkey, including unfavorable political and economic developments, social instability and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policies;

• our ability to hedge certain risks economically;

• downgrades in our credit ratings or in the Kingdom of Spain’s credit ratings;

• the success of our acquisitions, divestitures, mergers and strategic alliances;

• our ability to make payments on certain substantial unfunded amounts relating to commitments with personnel;

• the performance of our international operations and our ability to manage such operations;

• weaknesses or failures in our Group’s internal processes, systems (including information technology systems) and security;

• our success in managing the risks involved in the foregoing, which depends, among other things, on our ability to anticipate events that are not captured by the statistical models we use; and

• force majeure and other events beyond our control.

Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

4

PRESENTATION OF FINANCIAL INFORMATION

Accounting Principles

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with EU-IFRS. The Bank of Spain issued Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (as amended or supplemented from time to time, “Circular 4/2004”), which requires Spanish credit institutions to adapt their accounting system to the principles derived from the adoption by the European Union of EU-IFRS.

Differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB are not material for the years ended December 31, 2016, 2015 and 2014. Accordingly, the Consolidated Financial Statements included in this Annual Report have been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB.

The financial information as of and for the years ended December 31, 2014, 2013 and 2012 may differ from previously reported financial information as of such dates and for such periods in our respective annual reports on Form 20-F for certain prior years, as a result mainly of the retrospective revisions referred to below (see “—Retrospective Revisions”). In addition, the financial information as of and for the year ended December 31, 2012 may differ from previously reported financial information as of such date and for such period in our annual report on Form 20-F for such year, as a result of the implementation of changes in the accounting standards set out in IFRS 10 and 11 that came into force in 2013.

Retrospective Revisions

New presentation models required by Circular 5/2015 of the CNMV

Our consolidated financial statements for the year ended December 31, 2016 have been prepared in accordance with the presentation models required by Circular 5/2015 of the National Securities Market Commission or “CNMV” (Comisión Nacional del Mercado de Valores). This Circular seeks to adapt the content of the financial information published by credit institutions and the format in which financial statements are presented to the mandatory regulation adopted by the European Union for credit institutions.

The information relating to the years ended December 31, 2015 and 2014 has been restated in accordance with the new presentation models referred to above. The presentation of our consolidated financial statements in accordance with these new models has had no significant impact on the financial statements included in the Consolidated Financial Statements for the years ended December 31, 2015 and 2014.

Reclassifications of certain operating expenses

In the fourth quarter of 2015, we reclassified several operating expenses related to technology from our Corporate Center to our Banking Activity in Spain segment. This reclassification was the result of the reassignment of technology-related management resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015.

In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect the reclassification of these expenses. This reclassification of expenses did not affect the Group’s consolidated income statements.

Changes in operating segments

On July 27, 2015, we acquired 62,538,000,000 shares (in the aggregate) of the Turkish bank Türkiye Garanti Bankası A.Ş. (“Garanti”) from Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, under certain agreements entered into on November 19, 2014. Following this acquisition, we held 39.90% of Garanti’s

5

share capital and started to fully consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity in accordance with our shareholders’ agreement with the Doğuş group. See “Item 4. Information on the Company—Material Contracts—Shareholders’ Agreement in Connection with Garanti.” On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “Item 4. Information on the Company—History and Development of the Company—Capital expenditures—2017.”

The acquisition completed in 2015 resulted in certain changes in our operating segments. In particular, since January 1, 2015, our former Eurasia segment has been recast into the following two segments: Turkey, which consists of our stake in Garanti (25.01% until July 27, 2015, 39.90% from July 27, 2015 to March 22, 2017 and 49.85% since March 22, 2017), and Rest of Eurasia, which includes the retail and wholesale businesses carried out in Europe and Asia, other than in Spain and Turkey.

In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect our current reporting structure. This revision did not affect the Group’s consolidated income statements.

There have been no significant changes to our operating segments during 2016 (see Note 6 to the Consolidated Financial Statements).

Business combinations

Certain financial information for the year ended December 31, 2015 has been restated, with no significant impact, as a result of the end in 2016 of the purchase accounting period relating to the stake in Garanti acquired in 2015, as required by IFRS 3 “Business Combinations” (see Note 18 to the Consolidated Financial Statements ).

Statistical and Financial Information

The following principles should be noted in reviewing the statistical and financial information contained herein:

• Average balances, when used, are based on the beginning and the month-end balances during each year. We do not believe that such monthly averages present trends that are materially different from those that would be presented by daily averages.

• Unless otherwise stated, any reference to loans refers to both loans and advances.

• Financial information with respect to segments or subsidiaries may not reflect consolidation adjustments.

• Certain numerical information in this Annual Report may not compute due to rounding. In addition, information regarding period-to-period changes is based on numbers which have not been rounded.

Venezuela

The local financial statements of the Group subsidiaries in Venezuela are expressed in Venezuelan bolivar and they are converted into euros for purposes of preparing the Group’s consolidated financial statements. Venezuela has strict foreign exchange restrictions and different exchange rates in place.

In past years, we have used different exchange rates to prepare the Group’s consolidated financial statements:

• Until January 1, 2014, we used the CADIVI exchange rate (named after the acronym, in Spanish, of the Foreign Exchange Administration Commission, currently the National Center for Foreign Trade or CENCOEX). As of December 31, 2013 the exchange rate was 8.68 Venezuelan bolivars per euro.

• In 2014 the Venezuelan government approved a new exchange rate system referred to as the “foreign-currency system”, in which the exchange rate against the U.S. dollar was determined in an auction which was open to both individuals and companies, resulting in an exchange rate that fluctuated from auction to auction

6

and was published on the website of the Complementary Currency Administration System (SICAD I). Subsequently, in July 2014, the Venezuelan government established a new type of auction called SICAD II only applicable to certain types of transactions and not applicable to credit institutions. As of December 31, 2014 the applicable exchange rate (SICAD I) was 14.71 Venezuelan bolivars per euro. For purposes of preparing our consolidated financial statements as of and for the year ended December 31, 2014 we used the SICAD I exchange rate.

• On February 10, 2015, the Venezuelan government announced the cancellation of SICAD II and its combination with SICAD I in order to create a new SICAD and the creation of a new foreign-currency system called SIMADI. The Group used the SIMADI exchange rate starting in March 2015 for purpose of the Group’s interim financial statements. The SIMADI exchange rate increased rapidly to approximately 218 Venezuelan bolivars per euro and stabilized during the second half of 2015 to 216.3 Venezuelan bolivars per euro as of December 31, 2015. However, as explained below, we have not used this exchange rate to prepare the Group’s Consolidated Financial Statements.

• In February 2016, the Venezuelan government approved a new exchange rate agreement which sets two new mechanisms (DICOM and SICOM) that regulate the purchase and sale of foreign currency and the suspension of the SIMADI exchange rate.

• The Bank’s Board of Directors determined that the use of the new DICOM and SICOM exchange rates and, previously, the SIMADI exchange rate, for converting bolivars into euros in preparing the consolidated financial statements, as of and for the years ended December 31, 2015 and 2016, would not provide an accurate picture of the consolidated financial statements of the Group or the financial position of the Group subsidiaries in Venezuela.

• Consequently, as of December 31, 2015 and 2016, the Group has used alternative conversion exchange rates in the conversion of the financial statements of the Group’s subsidiaries in Venezuela of 469 and 1,893 Venezuelan bolivars per euro, respectively. These exchanges rates have been calculated by BBVA Research taking into account the estimated evolution of inflation in Venezuela in 2015 and 2016 (170% and 300%, respectively) (see Note 2.2.20 to the Consolidated Financial Statements).

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A. Director and Senior Management

Not Applicable.

B. Advisers

Not Applicable.

C. Auditors

Not Applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

7

ITEM 3. KEY INFORMATION

A. Selected Consolidated Financial Data

The historical financial information set forth below for the years ended December 31, 2016, 2015 and 2014 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. The audited consolidated financial statements for 2013 and 2012 are not included in this document, and they instead are derived from the respective annual reports on Form 20-F for certain prior years previously filed by us with retrospective adjustments made for the application of certain changes in accounting principles.

For information concerning the preparation and presentation of the financial information contained herein, see “Presentation of Financial Information”.

	Year Ended December 31,
	2016			2015			2014			2013 (1)			2012 (1)
	(In Millions of Euros, Except Per Share/ADS Data (In Euros))
Consolidated Statement of Income Data
Interest and similar income		27,708			24,783			22,838			23,512			24,815
Interest and similar expenses		(10,648	)		(8,761	)		(8,456	)		(9,612	)		(10,341	)
Net interest income		17,059			16,022			14,382			13,900			14,474
Dividend income		467			415			531			235			390
Share of profit or loss of entities accounted for using the equity method		25			174			343			694			1,039
Fee and commission income		6,804			6,340			5,530			5,478			5,290
Fee and commission expenses		(2,086	)		(1,729	)		(1,356	)		(1,228	)		(1,134	)
Net gains(losses) on financial assets and liabilities		1,661			865			1,435			1,608			1,636
Exchange differences (net)		472			1,165			699			903			69
Other operating income		1,272			1,315			959			1,234			1,108
Other operating expenses		(2,128	)		(2,285	)		(2,705	)		(3,002	)		(2,045	)
Income on insurance and reinsurance contracts		3,652			3,678			3,622			3,761			3,657
Expenses on insurance and reinsurance contracts		(2,545	)		(2,599	)		(2,714	)		(2,831	)		(2,660	)
Gross income		24,653			23,362			20,725			20,752			21,824
Administration costs		(11,366	)		(10,836	)		(9,414	)		(9,701	)		(9,396	)
Depreciation		(1,426	)		(1,272	)		(1,145	)		(1,095	)		(978	)
Provisions or (-) reversal of provisions		(1,186	)		(731	)		(1,142	)		(609	)		(641	)
Impairment losses on financial assets (net)		(3,801	)		(4,272	)		(4,340	)		(5,612	)		(7,859	)
Net operating income		6,874			6,251			4,684			3,735			2,950
Impairment losses on other assets (net)		(521	)		(273	)		(297	)		(467	)		(1,123	)
Gains (losses) on derecognition of non-financial assets and subsidiaries, net		70			(2,135	)		46			(1,915	)		3
Negative goodwill recognized in profit or loss		—			26			—			—			376
Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations		(31	)		734			(453	)		(399	)		(624	)
Operating profit before tax		6,392			4,603			3,980			954			1,582
Tax expense or (-) income related to profit or loss from continuing operations		(1,699	)		(1,274	)		(898	)		16			352
Profit from continuing operations		4,693			3,328			3,082			970			1,934
Profit from discontinued operations (net) (2)		—			—			—			1,866			393
Profit		4,693			3,328			3,082			2,836			2,327
Profit attributable to parent company		3,475			2,642			2,618			2,084			1,676
Profit attributable to non-controlling interests		1,218			686			464			753			651
Per share/ADS(3) Data
Profit from continuing operations		0.71			0.52			0.50			0.17			0.35
Diluted profit attributable to parent company (4)		0.50			0.37			0.40			0.33			0.30
Basic profit attributable to parent company		0.50			0.37			0.40			0.33			0.30
Dividends declared (In Euros)		0.160			0.160			0.080			0.100			0.200
Dividends declared (In U.S. dollars)		0.169			0.174			0.097			0.138			0.264
Number of shares outstanding (at period end)		6,566,615,242			6,366,680,118			6,171,338,995			5,785,954,443			5,448,849,545

⁽¹⁾ Restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies).

8

⁽²⁾ For 2013 and 2012, includes the capital gains from the sale of Afore Bancomer in Mexico and the South America pension fund administrators, as well as the earnings recorded by these companies up to the date of these sales.

⁽³⁾  Each American Depositary Share (“ADS”) represents the right to receive one ordinary share.

⁽⁴⁾  Calculated on the basis of the weighted average number of BBVA’s ordinary shares outstanding during the relevant period including the average number of estimated shares to be converted and, for comparative purposes, a correction factor to account for the capital increases carried out in April 2012, October 2012, April 2013, October 2013, April 2014, October 2014, December 2014, April 2015, October 2015, December 2015, April 2016 and October 2016, excluding the weighted average number of treasury shares during the period (6,468 million, 6,290 million, 5,905 million, 5,597 million and 5,829 million shares in 2016, 2015, 2014, 2013 and 2012, respectively). With respect to the years ended December 31, 2016, 2015 and 2014, see Note 5 to the Consolidated Financial Statements.

	As of and for Year Ended December 31,
	2016			2015			2014			2013 (1)			2012 (1)
	(In Millions of Euros, Except Percentages)
Consolidated Balance Sheet Data
Total assets		731,856			749,855			631,942			582,697			621,132
Net assets		55,428			55,282			51,609			44,565			43,802
Common stock		3,218			3,120			3,024			2,835			2,670
Loans and receivables (net)		465,977			471,828			376,086			350,945			371,347
Customer deposits		401,465			403,362			319,334			300,490			282,795
Debt certificates and subordinated liabilities		76,375			81,980			71,917			74,676			98,070
Non-controlling interest		8,064			7,992			2,511			2,371			2,372
Total equity		55,428			55,282			51,609			44,565			43, 802
Consolidated ratios
Profitability ratios:
Net interest margin(2)		2.32	%		2.27	%		2.40	%		2.32	%		2.38	%
Return on average total assets(3)		0.6	%		0.5	%		0.5	%		0.5	%		0.4	%
Return on average total stockholders’ funds (4)		6.7	%		5.3	%		5.6	%		5.0	%		4.1	%
Credit quality data
Loan loss reserve (5)		16,016			18,742			14,273			14,990			14,144
Loan loss reserve as a percentage of total loans and receivables (net)		3.44	%		3.97	%		3.83	%		4.27	%		3.81	%
Non-performing asset ratio (NPA ratio) (6)		4.90	%		5.39	%		5.98	%		6.95	%		5.06	%
Impaired loans and advances to customers		22,915			25,333			22,703			25,445			19,960
Impaired contingent liabilities to customers (7)		680			664			413			410			312
		23,595			25,997			23,116			25,855			20,272
Loans and advances to customers		430,629			432,921			353,029			338,664			356,521
Contingent liabilities to customers		50,540			49,876			33,741			33,543			36,891
		481,169			482,797			386,770			372,207			393,412

⁽¹⁾ Information has been restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies).

⁽²⁾ Represents net interest income as a percentage of average total assets.

⁽³⁾  Represents profit as a percentage of average total assets.

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⁽⁴⁾  Represents profit attributable to parent company for the year as a percentage of average stockholders’ funds for the year, excluding “Non-controlling interest”.

⁽⁵⁾  Represents impairment losses on loans and receivables to credit institutions, loans and advances to customers and debt securities. See Note 13 to the Consolidated Financial Statements.

⁽⁶⁾  Represents the sum of impaired loans and advances to customers and impaired contingent liabilities to customers divided by the sum of loans and advances to customers and contingent liabilities to customers.

⁽⁷⁾  We include contingent liabilities in the calculation of our non-performing asset ratio (NPA ratio). We believe that impaired contingent liabilities should be included in the calculation of our NPA ratio where we have reason to know, as of the reporting date, that they are impaired. The credit risk associated with contingent liabilities (consisting mainly of financial guarantees provided to third-parties on behalf of our customers) is evaluated and provisioned according to the probability of default of our customers’ obligations. If impaired contingent liabilities were not included in the calculation of our NPA ratio, such ratio would generally be higher for the periods covered, amounting to approximately 5.3%,5.9%, 6.4%, 7.5% and 5.6% as of December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

Exchange Rates

Spain’s currency is the euro. Unless otherwise indicated, the amounts that have been converted to euro in this Annual Report have been done so at the corresponding exchange rate published by the European Central Bank (“ECB”) on December 31 of the relevant period.

For convenience in the analysis of the information, the following tables describe, for the periods and dates indicated, information concerning the noon buying rate for euro, expressed in dollars per €1.00. The term “noon buying rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes.

Year ended December 31,	Average(1)
2012		1.2908
2013		1.3303
2014		1.3210
2015		1.1032
2016		1.1029
2017 (through March 24, 2017)		1.0650

⁽¹⁾  Calculated by using the average of the exchange rates on the last day of each month during the period.

Month ended	High		Low
September 30, 2016		1.1271		1.1158
October 31, 2016		1.1212		1.0866
November 30, 2016		1.1121		1.0560
December 31, 2016		1.0758		1.0375
January 31, 2017		1.0794		1.0416
February 28, 2017		1.0802		1.0551
March 31, 2017 (through March 24, 2017)		1.0810		1.0514

The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on March 24, 2017, was $1.0806.

As of December 31, 2016, approximately 47% of our assets and approximately 46% of our liabilities were denominated in currencies other than euro. See Note 2.2.16 to our Consolidated Financial Statements.

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For a discussion of our foreign currency exposure, please see Note 7.4.2 to our Consolidated Financial Statements (“Market Risk—Structural Exchange Rate Risk”) and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

Macroeconomic Risks

Economic conditions in the countries where the Group operates could have a material adverse effect on the Group’s business, financial condition and results of operations

Despite the recent growth of the global economy, uncertainty remains. The deterioration of economic conditions in the countries where the Group operates could adversely affect the cost and availability of funding for the Group, the quality of the Group’s loan and investment securities portfolios and levels of deposits and profitability, which may also require the Group to take impairments on its exposures to the sovereign debt of one or more countries or otherwise adversely affect the Group’s business, financial condition and results of operations. In addition, the process the Group uses to estimate losses inherent in its credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of its borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of the Group’s estimates, which may, in turn, affect the reliability of the process and the sufficiency of the Group’s loan loss provisions.

The Group faces, among others, the following economic risks:

• weak economic growth or recession in the countries where it operates;

• changes in the institutional environment in the countries where it operates could evolve into sudden and intense economic and/or regulatory downturns;

• deflation, mainly in Europe, or significant inflation, such as the significant inflation recently experienced by Venezuela and Argentina;

• changes in foreign exchange rates, such as the recent local currency devaluations in Venezuela and Argentina, as they result in changes in the reported earnings of the Group’s subsidiaries outside the Eurozone, and their assets, including their risk-weighted assets, and liabilities;

• a lower interest rate environment, even a prolonged period of negative interest rates in some areas where the Bank operates, which could lead to decreased lending margins and lower returns on assets;

• a higher interest rate environment, including as a result of an increase in interest rates by the Federal Reserve or any further tightening of monetary policies, including to address inflationary pressures and currency devaluations in Latin America, which could endanger a still tepid and fragile economic recovery and make it more difficult for customers of the Group’s mortgage and consumer loan products to service their debts;

• adverse developments in the real estate market, especially in Spain, Mexico, the United States and Turkey, given the Group’s exposures to such markets;

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• poor employment growth and structural challenges restricting employment growth, such as in Spain, where unemployment has remained relatively high, which may negatively affect the household income levels of the Group’s retail customers and may adversely affect the recoverability of the Group’s retail loans, resulting in increased loan loss provisions;

• lower oil prices, which could particularly affect producing areas, such as Venezuela, Mexico, Texas or Colombia, to which the Group is materially exposed;

• changes in laws, regulations and policies as a result of election processes in the different geographies in which the Group operates, including Spain, the Spanish region of Catalonia and the United States, which may negatively affect the Group’s business or customers in those geographies and other geographies in which the Group operates;

• the potential exit by an EU Member State from the European Monetary Union (“EMU”), which could materially adversely affect the European and global economy, cause a redenomination of financial instruments or other contractual obligations from the euro to a different currency and substantially disrupt capital, interbank, banking and other markets, among other effects;

• the possible political, economic and regulatory impacts in the United Kingdom and the European Union (“EU”) derived from the outcome of the referendum held in the United Kingdom on June 23, 2016, which resulted in a vote in favor of the United Kingdom leaving the EU. The possible impact of the United Kingdom exiting the EU could include, among other things, political instability in the United Kingdom, the EU as a whole, or countries forming part of the EU; regulatory changes in the United Kingdom and/or in the EU; economic slowdown in the United Kingdom, in the EU and/or outside the EU; deterioration of the creditworthiness of borrowers based in or related to the United Kingdom; and volatility in financial markets which could limit or condition BBVA’s or any other issuer’s access to capital markets, all of which may arise regardless of the uncertainty as to the timing and duration of the exit process; and

• an eventual government default on public debt, which could affect the Group primarily in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is generally high in several countries in which the Group operates.

For additional information relating to certain economic risks that the Group faces in Spain, see “— Since the Group’s loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on its financial condition.” For additional information relating to certain economic risks that the Group faces in emerging market economies such as Latin America and Turkey, see “— The Group may be materially adversely affected by developments in the emerging markets where it operates.”

Any of the above risks could have a material adverse effect on the Group’s business, financial condition and results of operations.

Since the Group’s loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on its financial condition

The Group has historically developed its lending business in Spain, which continues to be one of the main focuses of its business. The Group’s loan portfolio in Spain has been adversely affected by the deterioration of the Spanish economy since 2009. After rapid economic growth until 2007, Spanish gross domestic product (“GDP”) contracted in the period 2009-10 and 2012-13. The effects of the financial crisis were particularly pronounced in Spain given its heightened need for foreign financing as reflected by its high current account deficit, resulting from the gap between domestic investment and savings, and its public deficit. The current account imbalance has been corrected and the public deficit is in a downward trend, with GDP growth above 3% in 2015 and 2016 and unemployment falling below 20% in 2016. However, real or perceived difficulties in servicing public or private debt, triggered by foreign or domestic factors such as an increase in global financial risk or a decrease in the rate of domestic growth, could increase Spain’s financing costs, hindering economic growth, employment and households’ gross disposable income.

12

The Spanish economy is particularly sensitive to economic conditions in the Eurozone, the main market for Spanish goods and services exports. Accordingly, an interruption in the recovery in the Eurozone might have an adverse effect on Spanish economic growth. Given the relevance of the Group’s loan portfolio in Spain, any adverse changes affecting the Spanish economy could have a material adverse effect on the Group’s business, financial condition and results of operations.

Any decline in the Kingdom of Spain’s sovereign credit ratings could adversely affect the Group’s business, financial condition and results of operations

Since the Bank is a Spanish company with substantial operations in Spain, its credit ratings may be adversely affected by the assessment by rating agencies of the creditworthiness of the Kingdom of Spain. As a result, any decline in the Kingdom of Spain’s sovereign credit ratings could result in a decline in the Bank’s credit ratings. In addition, the Group holds a substantial amount of securities issued by the Kingdom of Spain, autonomous communities within Spain and other Spanish issuers. Any decline in the Kingdom of Spain’s credit ratings could adversely affect the value of the Kingdom of Spain’s and other public or private Spanish issuers’ respective securities held by the Group in its various portfolios or otherwise materially adversely affect the Group’s business, financial condition and results of operations. Furthermore, the counterparties to many of the Group’s loan agreements could be similarly affected by any decline in the Kingdom of Spain’s credit ratings, which could limit their ability to raise additional capital or otherwise adversely affect their ability to repay their outstanding commitments to the Group and, in turn, materially and adversely affect the Group’s business, financial condition and results of operations.

The Group may be materially adversely affected by developments in the emerging markets where it operates

The economies of some of the emerging markets where the Group operates, mainly Latin America and Turkey, experienced significant volatility in recent decades, characterized, in some cases, by slow or declining growth, declining investment and hyperinflation.

Emerging markets are generally subject to greater risks than more developed markets. For example, there is typically a greater risk of loss from unfavorable political and economic developments, social and geopolitical instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies, and political unrest, such as the attempted coup in Turkey on July 15, 2016 and state of emergency entitling the exercise of additional powers by the Turkish government first declared on July 20, 2016. In addition, these emerging markets are affected by conditions in other related markets and in global financial markets generally and some are particularly affected by commodities price fluctuations, which in turn may affect financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. As a global economic recovery remains fragile, there are risks of deterioration. If the global economic conditions deteriorate, the business, financial condition, operating results and cash flows of the Bank’s subsidiaries in emerging economies, mainly in Latin America and Turkey, may be materially adversely affected.

Furthermore, financial turmoil in any particular emerging market could negatively affect other emerging markets or the global economy in general. Financial turmoil in emerging markets tends to adversely affect stock prices and debt securities prices of other emerging markets as investors move their money to more stable and developed markets, and may reduce liquidity to companies located in the affected markets. An increase in the perceived risks associated with investing in emerging economies in general, or the emerging market economies where the Group operates in particular, could dampen capital flows to such economies and adversely affect such economies.

In addition, any changes in laws, regulations and policies pursued by the incoming U.S. Government may adversely affect the emerging markets in which the Group operates, particularly Mexico due to the trade and other ties between Mexico and the United States.

13

If economic conditions in the emerging market economies where the Group operates deteriorate, the Group’s business, financial condition and results of operations could be materially adversely affected.

The Group’s earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions

Severe market events such as the past sovereign debt crisis, rising risk premiums and falls in share market prices, have resulted in the Group recording large write-downs on its credit market exposures in recent years. Several factors could further depress the valuation of our assets. Current political processes such as the implementation of the “Brexit” referendum for the United Kingdom to leave the European Union, the surge of populist trends in several European countries or potential changes in U.S. economic policies implemented by the new administration, could increase global financial volatility and lead to the reallocation of assets. Doubts on the asset quality of European banks have also affected their evolution in the market during 2016 and such doubts might remain in 2017. In addition, uncertainty about China’s growth expectations and its policymaking capability to address certain severe future challenges has recently resulted in sudden and intense deterioration of the valuation of global assets and further increased volatility in the global financial markets. Additionally, in dislocated markets, hedging and other risk management strategies may not be as effective as they are in more normal market conditions due in part to the decreasing credit quality of hedge counterparties. Any deterioration in economic and financial market conditions could lead to further impairment charges and write-downs.

Exposure to the real estate market makes the Group vulnerable to developments in this market

The Group has substantial exposure to the real estate market, mainly in Spain, Mexico and the United States. The Group is exposed to the real estate market due to the fact that real estate assets secure many of its outstanding loans and due to the significant amount of real estate assets held on its balance sheet. Any deterioration of real estate prices could materially and adversely affect the Group’s business, financial condition and results of operations.

Legal, Regulatory and Compliance Risks

The Group is subject to substantial regulation and regulatory and governmental oversight. Changes in the regulatory framework could have a material adverse effect on its business, results of operations and financial condition

The financial services industry is among the most highly regulated industries in the world. In response to the global financial crisis and the European sovereign debt crisis, governments, regulatory authorities and others have made and continue to make proposals to reform the regulatory framework for the financial services industry to enhance its resilience against future crises. Legislation has already been enacted and regulations issued in response to some of these proposals. The regulatory framework for financial institutions is likely to undergo further significant change. This creates significant uncertainty for the Group and the financial industry in general. The wide range of recent actions or current proposals includes, among other things, provisions for more stringent regulatory capital and liquidity standards, restrictions on compensation practices, special bank levies and financial transaction taxes, recovery and resolution powers to intervene in a crisis including “bail-in” of creditors, separation of certain businesses from deposit taking, stress testing and capital planning regimes, heightened reporting requirements and reforms of derivatives, other financial instruments, investment products and market infrastructures.

In addition, the new institutional structure in Europe for supervision, with the creation of the single supervisor, and for resolution, with the single resolution mechanism, is changing the supervisory landscape. The specific effects of a number of new laws and regulations remain uncertain because the drafting and implementation of these laws and regulations are still ongoing. In addition, since some of these laws and regulations have been recently adopted, the manner in which they are applied to the operations of financial institutions is still evolving. No assurance can be given that laws or regulations will be enforced or interpreted in a manner that will not have a material adverse effect on the Group’s business, financial condition, results of operations and cash flows. In addition, regulatory scrutiny under existing laws and regulations has become more intense.

14

Furthermore, regulatory and supervisory authorities have substantial discretion in how to regulate and supervise banks, and this discretion, and the means available to regulators and supervisors, have been steadily increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis, and these may especially affect financial institutions that are deemed to be systemically important (including institutions deemed to be of local systemic importance, domestic systemically important banks or “D-SIBs”, such as the Bank).

In addition, local regulations in certain jurisdictions where the Group operates differ in a number of material respects from equivalent regulations in Spain or the United States. Changes in regulations may have a material adverse effect on the Group’s business, results of operations and financial condition, particularly in Mexico, the United States, Venezuela, Argentina and Turkey. Furthermore, regulatory fragmentation, with some countries implementing new and more stringent standards or regulation, could adversely affect the Group’s ability to compete with financial institutions based in other jurisdictions which do not need to comply with such new standards or regulation. In addition, financial institutions which are based in other jurisdictions, including the United States, could benefit from any deregulation efforts implemented in such jurisdictions. Moreover, to the extent recently adopted regulations are implemented inconsistently in the various jurisdictions in which the Group operates, the Group may face higher compliance costs.

Any required changes to the Group’s business operations resulting from the legislation and regulations applicable to such business could result in significant loss of revenue, limit the Group’s ability to pursue business opportunities in which the Group might otherwise consider engaging, affect the value of assets that the Group holds, require the Group to increase its prices and therefore reduce demand for its products, impose additional costs on the Group or otherwise adversely affect the Group’s businesses. For example, the Group is subject to substantial regulation relating to liquidity. Future liquidity standards could require it to maintain a greater proportion of its assets in highly liquid but lower-yielding financial instruments, which would negatively affect its net interest margin. Moreover, the Group’s regulators, as part of their supervisory function, periodically review the Group’s allowance for loan losses. Such regulators may require the Group to increase its allowance for loan losses or to recognize further losses. Any such additional provisions for loan losses, as required by these regulatory agencies whose views may differ from those of the Group’s management, could have an adverse effect on the Group’s earnings and financial condition.

Adverse regulatory developments or changes in government policy relating to any of the foregoing or other matters could have a material adverse effect on the Group’s business, results of operations and financial condition.

Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations

As a Spanish credit institution, the Bank is subject to Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (the “CRD IV Directive”), through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. The core regulation regarding the solvency of credit entities is Regulation (EU) No. 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (the “CRR” and, together with the CRD IV Directive and any measures implementing the CRD IV Directive or the CRR which may from time to time be introduced in Spain, “CRD IV”), which is complemented by several binding regulatory technical standards, all of which are directly applicable in all EU Member States, without the need for national implementation measures. The implementation of CRD IV Directive into Spanish law has taken place through Royal Decree-Law 14/2013 of November 29 (“RD-L 14/2013”), Law 10/2014 of June 26, on the organization, supervision and solvency of credit institutions (“Law 10/2014”), Royal Decree 84/2015, of February 13 (“RD 84/2015”), Bank of Spain Circular 2/2014, of January 31 and Bank of Spain Circular 2/2016 of February 2 (the “Bank of Spain Circular 2/2016”). On November 23, 2016, the European Commission published a package of proposals with further reforms to CRD IV, Directive 2014/59/EU of May 15 establishing a framework for the recovery and resolution of credit institutions and investment firms (the “BRRD”) and Regulation (EU) No. 806/2014 of the European Parliament and the Council of the European Union

15

(the “SRM Regulation”) (the “EU Banking Reforms”), including measures to increase the resilience of EU institutions and enhance financial stability. The timing for the final implementation of these reforms as at the date of this Annual Report is unclear.

CRD IV has, among other things, established minimum “Pillar 1” capital requirements and increased the level of capital required by means of a “combined buffer requirement” that entities must comply with from 2016 onwards. The “combined buffer requirement” has introduced five new capital buffers: (i) the capital conservation buffer, (ii) the global systemically important institutions buffer (the “G-SIB buffer”), (iii) the institution-specific countercyclical buffer, (iv) the other systemically important institutions buffer (the “D-SIB buffer”) and (v) the systemic risk buffer. The “combined buffer requirement” applies in addition to the minimum “Pillar 1” capital requirements and is required to be satisfied with Common Equity Tier 1 (“CET1”) capital.

The G-SIB buffer applies to those institutions included on the list of global systemically important banks (“G-SIBs”), which is updated annually by the Financial Stability Board (the “FSB”). The Bank has been excluded from this list with effect from January 1, 2017 and so, unless otherwise indicated by the FSB (or the Bank of Spain) in the future, it will no longer be required to maintain a G-SIB buffer.

The Bank of Spain announced on November 7, 2016 that the Bank will continue to be considered a D-SIB, and consequently the Bank will be required to maintain during 2017 a D-SIB buffer of a CET1 capital ratio of 0.75% on a consolidated basis. The D-SIB buffer is being phased-in from January 1, 2016 to January 1, 2019, with the result that the D-SIB buffer applicable to the Bank for 2017 is a CET1 capital ratio of 0.375% on a consolidated basis.

The Bank of Spain has greater discretion in relation to the institution-specific countercyclical buffer, the buffer for D-SIBs and the systemic risk buffer (a buffer to prevent systemic or macro prudential risks). With the entry into force of the Single Supervisory Mechanism (the “SSM”) on November 4, 2014, the ECB also has the ability to provide certain recommendations in this respect.

The Bank of Spain agreed in December 2015 to set the countercyclical capital buffer applicable to credit exposures in Spain at 0% from January 1, 2016. These percentages are revised each quarter and, accordingly, the Bank of Spain agreed in March 2017 to maintain the countercyclical capital buffer at 0% for the second quarter of 2017.

Moreover, Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of Council Regulation (EU) No. 1024/2013 of October 15, 2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions (the “SSM Framework Regulation”), also contemplates that in addition to the minimum “Pillar 1” capital requirements and the combined buffer requirements, supervisory authorities may impose (above “Pillar 1” requirements and below the combined buffer requirements) further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum “own funds” “Pillar 1” requirements under CRD IV or to address macro-prudential considerations.

In accordance with the SSM Framework Regulation, the ECB has fully assumed its new supervisory responsibilities of BBVA and the Group within the SSM. The ECB is required under the SSM Framework Regulation to carry out a supervisory review and evaluation process (the “SREP”) of BBVA and the Group at least on an annual basis.

In addition to the above, the European Banking Authority (the “EBA”) published on December 19, 2014 its final guidelines for common procedures and methodologies in respect of the SREP (the “EBA SREP Guidelines”). Included in this were the EBA’s proposed guidelines for a common approach to determining the amount and composition of additional “Pillar 2” own funds requirements to be implemented from January 1, 2016. Under these guidelines, national supervisors should set a composition requirement for the “Pillar 2” requirements to cover certain specified risks of at least 56% CET1 capital and at least 75% Tier 1 capital, as it has also been included in the EU Banking Reforms. The guidelines also contemplate that national supervisors should not set additional own funds requirements in respect of risks which are already covered by the “combined buffer requirement” and/or additional macro-prudential requirements.

Any additional “Pillar 2” own funds requirement that may be imposed on the Bank and/or the Group by the ECB pursuant to the SREP will require the Bank and/or the Group to hold capital levels above the minimum “Pillar 1” capital requirements.

16

As a result of the most recent SREP carried out by the ECB in 2016, the Bank has been informed by the ECB that, effective from January 1, 2017, it is required to maintain (i) a CET1 phased-in capital ratio of 7.625% (on a consolidated basis) and 7.25% (on an individual basis); and (ii) a phased-in total capital ratio of 11.125% (on a consolidated basis) and 10.75% (on an individual basis).

This phased-in total capital ratio of 11.125 % on a consolidated basis includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%); (ii) the “Pillar 1” Additional Tier 1 capital requirement (1.5%); (iii) the “Pillar 1” Tier 2 capital requirement (2.0%); (iv) the additional CET1 capital requirement under “Pillar 2” (1.5%); (v) the capital conservation buffer (1.25% CET1); and (vi) the D-SIBs buffer (0.375% CET1).

As of December 31, 2016, the Bank’s phased-in total capital ratio was 15.14% on a consolidated basis and 21.83% on an individual basis. As of December 31, 2016, the Bank’s CET1 phased-in capital ratio was 12.18% on a consolidated basis and 17.56% on an individual basis. Such ratios exceed the applicable regulatory requirements described above, but there can be no assurance that the total capital requirements imposed on the Bank and/or the Group from time to time may not be higher than the levels of capital available at such point in time. There can also be no assurance as to the result of any future SREP carried out by the ECB and whether this will impose any further “Pillar 2” additional own funds requirements on the Bank and/or the Group.

The EU Banking Reforms propose new requirements that capital instruments should meet in order to be considered as Additional Tier 1 instruments or Tier 2 instruments. In accordance with the EU Banking Reforms, these new requirements are not subject to a grandfathering or exemption regime for currently issued Additional Tier 1 instruments and/or Tier 2 instruments. As a result, such instruments could be subject to regulatory uncertainties on their eligibility as capital if the EU Banking Reforms are approved in the form in which they were originally published, which may lead to regulatory capital shortfalls and ultimately a breach of the applicable minimum regulatory capital requirements.

Any failure by the Bank and/or the Group to maintain its “Pillar 1” minimum regulatory capital ratios, any “Pillar 2” additional own funds requirements and/or any “combined buffer requirement” could result in administrative actions or sanctions, which, in turn, may have a material adverse effect on the Group’s results of operations. In particular, any failure to maintain any additional capital requirements pursuant to the “Pillar 2” framework or any other capital requirements to which the Bank and/or the Group is or becomes subject (including the “combined buffer requirement”), may result in the imposition of restrictions or prohibitions on “discretionary payments” by the Bank as discussed below.

According to Article 48 of Law 10/2014, Article 73 of RD 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, any entity not meeting its “combined buffer requirement” is required to determine its Maximum Distributable Amount (“MDA”) as described therein. Until the MDA has been calculated and communicated to the Bank of Spain, where applicable, the relevant entity will be subject to restrictions on (i) distributions relating to CET1 capital, (ii) payments in respect of variable remuneration or discretionary pension revenues and (iii) distributions relating to Additional Tier 1 instruments (“discretionary payments”) and, thereafter, any such discretionary payments by that entity will be subject to such MDA limit.

Furthermore, as set forth in Article 48 of Law 10/2014, the adoption by the Bank of Spain of the measures prescribed in Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds or limiting or prohibiting the distribution of dividends respectively will also restrict discretionary payments to such MDA. Pursuant to the EU Banking Reforms, MDA could also be affected by a breach of MREL (as defined below) (see “— Any failure by the Bank and/or the Group to comply with its minimum requirement for own funds and eligible liabilities (MREL) could have a material adverse effect on the Bank’s business, financial condition and results of operations.” below).

As set out in the “Opinion of the European Banking Authority on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions” published on December 16, 2015 (the “December 2015 EBA Opinion”), in the EBA’s opinion competent authorities should ensure that the CET1 capital to be taken into account in determining the CET1 capital available to meet the “combined buffer requirement” for the purposes of the MDA calculation is limited to the amount not used to meet the “Pillar 1” and, if applicable, “Pillar 2” own

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funds requirements of the institution. In addition, the December 2015 EBA Opinion advises the European Commission (i) to review Article 141 of the CRD IV Directive with a view to avoiding differing interpretations of Article 141(6) and ensure greater consistency between the maximum distributable amount framework and the capital stacking order described in the opinion and in the EBA SREP Guidelines by which the “Pillar 1” and, if applicable, “Pillar 2” capital requirements represent the minimum capital to be preserved at all times by an institution and it is only the CET1 capital of that institution not used to meet its “Pillar 1” and, if applicable, “Pillar 2” requirements that is then available to meet the “combined buffer requirement” of the institution and (ii) to review the prohibition on distributions in all circumstances where an institution fails to meet the “combined buffer requirement” and no profits are made in any given year, notably insofar as it relates to Additional Tier 1 instruments. There can be no assurance as to how and when binding effect will be given to the December 2015 EBA Opinion in Spain, including as to the consequences for an institution of its capital levels falling below those necessary to meet these requirements. The EU Banking Reforms propose certain amendments in order to clarify, for the purposes of restrictions on distributions, the hierarchy between the “Pillar 2” additional own funds requirements, the minimum “own funds” “Pillar 1” requirements, the own funds and eligible liabilities requirement, MREL requirements and the “combined buffer requirements” (which is referred to as “stacking order”). Furthermore, pursuant to the EU Banking Reforms, an institution would not be entitled to make distributions relating to CET1 capital or payments in respect of variable remuneration or discretionary pension revenues, before having made the payments due on Additional Tier 1 instruments.

On July 1, 2016, the EBA published additional information explaining how supervisors intend to use the results of an EU-wide stress test for SREP in 2016 (which results were published on July 29, 2016). The EBA stated, among other things, that the incorporation of the quantitative results of the EU-wide stress test into SREP assessments may include setting additional supervisory monitoring metrics in the form of capital guidance. Such guidance will not be included in MDA calculations but competent authorities would expect banks to meet that guidance except when explicitly agreed. Competent authorities have remedial tools if an institution refuses to follow such guidance. The EU Banking Reforms also propose that a distinction be made between “Pillar 2” capital requirements and guidance, with only the former being mandatory requirements. Notwithstanding the foregoing, the EU Banking Reforms propose that supervisory authorities be entitled to impose further “Pillar 2” capital requirements where an institution repeatedly fails to follow the guidance previously imposed.

The ECB has also set out in its recommendation of December 13, 2016 on dividend distribution policies that credit institutions should establish dividend policies using conservative and prudent assumptions in order, after any distribution, to satisfy the applicable capital requirements.

Any failure by the Bank and/or the Group to comply with its regulatory capital requirements could also result in the imposition of further “Pillar 2” requirements and the adoption of any early intervention or, ultimately, resolution measures by resolution authorities pursuant to Law 11/2015 of June 18 on the Recovery and Resolution of Credit Institutions and Investment Firms (Ley 11/2015 de 18 de junio de recuperación y resolución de entidades de crédito y empresas de servicios de inversión), as amended, replaced or supplemented from time to time (“Law 11/2015”), which, together with Royal Decree 1012/2015 of November 6 by virtue of which Law 11/2015 is developed and Royal Decree 2606/1996 of December 20 on credit entities’ deposit guarantee fund is amended (“RD 1012/2015”), has implemented the BRRD into Spanish law. See “— Bail-in and write-down powers under the BRRD may adversely affect our business and the value of any securities we may issue” below.

At its meeting of January 12, 2014, the oversight body of the Basel Committee on Banking Supervision (“BCBS”) endorsed the definition of the leverage ratio set forth in CRD IV, to promote consistent disclosure, which applied from January 1, 2015. There will be a mandatory minimum capital requirement on January 1, 2018, with an initial minimum leverage ratio of 3% that can be raised after calibration. The proposed revisions to the design and calibration of the leverage ratio were set out in the BCBS April 2016 consultation paper entitled “Revisions to the Basel III leverage ratio framework”. The consultation period ended on July 6, 2016, and BCBS shall finalize the calibration of the leverage ratio for it to be implemented by January 1, 2018. The EU Banking Reforms propose a binding leverage ratio requirement of 3% of Tier 1 capital that is added to an institution’s own funds requirements and that an institution must meet in addition to its risk based requirements.

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Basel III implementation differs across jurisdictions in terms of timing and applicable rules. This lack of uniformity among implemented rules may lead to an uneven playing field and to competition distortions. Moreover, the lack of regulatory coordination, with some countries bringing forward the application of Basel III requirements or increasing such requirements, could adversely affect a bank with global operations such as the Bank and could undermine its profitability.

There can be no assurance that the implementation of the above capital requirements will not adversely affect the Bank’s ability to pay “discretionary payments” or result in the cancellation of such payments (in whole or in part), or require the Bank to issue additional securities that qualify as regulatory capital, to liquidate assets, to curtail business or to take any other actions, any of which may have adverse effects on the Bank’s business, financial condition and results of operations. Furthermore, increased capital requirements may negatively affect the Bank’s return on equity and other financial performance indicators.

Bail-in and write-down powers under the BRRD may adversely affect our business and the value of any securities we may issue

The BRRD (which has been implemented in Spain through Law 11/2015 and RD 1012/2015) is designed to provide authorities with a credible set of tools to intervene sufficiently early and quickly in unsound or failing credit institutions or investment firms (each, an “institution”) so as to ensure the continuity of the institution’s critical financial and economic functions, while minimizing the impact of an institution’s failure on the economy and financial system. The BRRD further provides that any extraordinary public financial support through additional financial stabilization tools is only to be used by a Member State as a last resort, after having assessed and exploited the below resolution tools to the maximum extent possible while maintaining financial stability.

In accordance with Article 20 of Law 11/2015, an institution will be considered as failing or likely to fail in any of the following circumstances: (i) it is, or is likely in the near future to be, in significant breach of its solvency or any other requirements necessary for maintaining its authorization; (ii) its assets are, or are likely in the near future to be, less than its liabilities; (iii) it is, or is likely in the near future to be, unable to pay its debts as they fall due; or (iv) it requires extraordinary public financial support (except in limited circumstances). The determination that an institution is no longer viable may depend on a number of factors which may be outside of that institution’s control.

As provided in the BRRD, Law 11/2015 contains four resolution tools and powers which may be used alone or in combination where the Fund for Orderly Bank Restructuring (Fondo de Restructuración Ordenada Bancaria) (the “FROB”), the Single Resolution Mechanism (“SRM”) or, as the case may be and according to Law 11/2015, the Bank of Spain or the Spanish Securities Market Commission or any other entity with the authority to exercise any such tools and powers from time to time (each, a “Relevant Spanish Resolution Authority”) as appropriate, considers that (a) an institution is failing or likely to fail, (b) there is no reasonable prospect that any alternative private sector measures would prevent the failure of such institution within a reasonable timeframe and (c) a resolution action is in the public interest. The four resolution tools are (i) sale of business, which enables resolution authorities to direct the sale of the institution or the whole or part of its business on commercial terms; (ii) bridge institution, which enables resolution authorities to transfer all or part of the business of the institution to a “bridge institution” (an entity created for this purpose that is wholly or partially in public control), which may limit the capacity of the institution to meet its repayment obligations; (iii) asset separation, which enables resolution authorities to transfer impaired or problem assets to one or more asset management vehicles to allow them to be managed with a view to maximizing their value through eventual sale or orderly wind-down (this can be used together with another resolution tool only); and (iv) bail-in, by which the Relevant Spanish Resolution Authority may exercise the Spanish Bail-in Power (as defined below). This includes the ability of the Relevant Spanish Resolution Authority to write down and/or convert into equity or other securities or obligations (which equity, securities and obligations could also be subject to any future application of the Spanish Bail-in Power) any obligation of an institution.

The “Spanish Bail-in Power” is any write-down, conversion, transfer, modification or suspension power existing from time to time under, and exercised in compliance with, any laws, regulations, rules or requirements in effect in Spain, relating to the transposition of the BRRD, as amended from time to time, including but not limited to (i) Law 11/2015, as amended from time to time; (ii) RD 1012/2015, as amended from time to time; (iii) the SRM

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Regulation, as amended from time to time; and (iv) any other instruments, rules or standards made in connection with either (i), (ii) or (iii), pursuant to which any obligation of an institution can be reduced (which may result in the reduction of the relevant claim to zero), cancelled, modified, transferred or converted into shares, other securities, or other obligations of such institution or any other person (or suspended for a temporary period).

In accordance with Article 48 of Law 11/2015 (and subject to any exclusions that may be applied by the Relevant Spanish Resolution Authority under Article 43 of Law 11/2015), in the case of any application of the Spanish Bail-in Power, the sequence of any resulting write-down or conversion by the Relevant Spanish Resolution Authority shall be in the following order: (i) CET1 instruments; (ii) Additional Tier 1 instruments; (iii) Tier 2 instruments; (iv) other subordinated claims that do not qualify as Additional Tier 1 capital or Tier 2 capital; and (v) the eligible senior claims prescribed in Article 41 of Law 11/2015.

In addition to the Spanish Bail-in Power, the BRRD and Law 11/2015 provide for resolution authorities to have the further power to permanently write-down or convert into equity capital instruments at the point of non-viability (“Non-Viability Loss Absorption”) of an institution or a group. The point of non-viability of an institution is the point at which the Relevant Spanish Resolution Authority determines that the institution meets the conditions for resolution or will no longer be viable unless the relevant capital instruments are written down or converted into equity or extraordinary public support is to be provided and without such support the Relevant Spanish Resolution Authority determines that the institution would no longer be viable. The point of non-viability of a group is the point at which the group infringes or there are objective elements to support a determination that the group, in the near future, will infringe its consolidated solvency requirements in a way that would justify action by the Relevant Spanish Resolution Authority in accordance with article 38.3 of Law 11/2015. Non-Viability Loss Absorption may be imposed prior to or in combination with any exercise of the Spanish Bail-in Power or any other resolution tool or power (where the conditions for resolution referred to above are met).

Any application of the Spanish Bail-in Power or Non-Viability Loss Absorption under the BRRD shall be in accordance with the hierarchy of claims in normal insolvency proceedings (unless otherwise provided by the laws, regulations, requirements, guidelines and policies relating to capital adequacy, resolution and/or solvency then applicable to the Bank and/or the Group, including, without limitation to the generality of the foregoing, CRD IV, the BRRD and those regulations, requirements, guidelines and policies relating to capital adequacy, resolution and/or solvency then in effect in Spain (whether or not such requirements, guidelines or policies have the force of law and whether or not they are applied generally or specifically to the Bank and/or the Group)).

To the extent that any resulting treatment of a holder of the Bank’s securities pursuant to the exercise of the Spanish Bail-in Power or Non-Viability Loss Absorption is less favorable than would have been the case under such hierarchy in normal insolvency proceedings, a holder of such affected securities would have a right to compensation under the BRRD based on an independent valuation of the institution. Any such compensation is unlikely to compensate that holder for the losses it has actually incurred and there is likely to be a considerable delay in the recovery of such compensation. Compensation payments (if any) are also likely to be made considerably later than when amounts may otherwise have been due under the affected securities.

The powers set out in the BRRD as implemented through Law 11/2015 and RD 1012/2015 impact how credit institutions and investment firms are managed, as well as, in certain circumstances, the rights of creditors. Pursuant to Law 11/2015, holders of, among others, unsecured debt securities, subordinated obligations and shares issued by us may be subject to, among other things, a write-down and/or conversion into equity or other securities or obligations on any application of the Spanish Bail-in Power and in the case of capital instruments may also be subject to any Non-Viability Loss Absorption. The exercise of any such powers (or any of the other resolution powers and tools) may result in such holders of such securities losing some or all of their investment or otherwise having their rights under such securities adversely affected. Such exercise could also involve modifications to, or the disapplication of, provisions in the terms and conditions of certain securities including alteration of the principal amount or any interest payable on debt instruments, the maturity date or any other dates on which payments may be due, as well as the suspension of payments for a certain period. As a result, the exercise of the Spanish Bail-in Power or, where applicable, the Non-Viability Loss Absorption with respect to such securities or the taking by an authority of any other action, or any suggestion that the exercise or taking of any such action may happen, could materially adversely affect the rights of holders of such securities, the market price or value or trading behavior of our securities and/or the ability of the Bank to satisfy its obligations under any such securities.

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The exercise of the Spanish Bail-in Power and/or Non-Viability Loss Absorption by the Relevant Spanish Resolution Authority is likely to be inherently unpredictable and may depend on a number of factors which may also be outside of the Bank’s control. In addition, as the Relevant Spanish Resolution Authority will retain an element of discretion, holders of such securities may not be able to refer to publicly available criteria in order to anticipate any potential exercise of any such Spanish Bail-in Power and/or Non-Viability Loss Absorption. Because of this inherent uncertainty, it will be difficult to predict when, if at all, the exercise of any such powers by the Relevant Spanish Resolution Authority may occur.

This uncertainty may adversely affect the value of the unsecured debt securities, subordinated obligations and shares issued by us. The price and trading behavior of such securities may be affected by the threat of a possible exercise of any power under Law 11/2015 (including any early intervention measure before any resolution) or any suggestion of such exercise, even if the likelihood of such exercise is remote. Moreover, the Relevant Spanish Resolution Authority may exercise any such powers without providing any advance notice to the holders of affected securities.

In addition, the EBA’s preparation of certain regulatory technical standards and implementing technical standards to be adopted by the European Commission and certain other guidelines is pending. These acts could be potentially relevant to determining when or how a Relevant Spanish Resolution Authority may exercise the Spanish Bail-in Power. The pending acts include guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments, and on the rate of conversion of debt to equity or other securities or obligations in any bail-in. No assurance can be given that, once adopted, these standards will not be detrimental to the rights under, and the value of unsecured debt securities, subordinated obligations and shares issued by us.

Any failure by the Bank and/or the Group to comply with its minimum requirement for own funds and eligible liabilities (MREL) could have a material adverse effect on the Bank’s business, financial condition and results of operations

The BRRD prescribes that banks shall hold a minimum level of own funds and eligible liabilities in relation to total liabilities (“MREL”). According to Commission Delegated Regulation (EU) 2016/1450 of May 23, 2016 (the “MREL Delegated Regulation”), the level of own funds and eligible liabilities required under MREL will be set by the resolution authority for each bank (and/or group) based on, among other things, the criteria set forth in Article 45.6 of the BRRD, including the systemic importance of the institution. Eligible liabilities may be senior or subordinated, provided that, among other requirements, they have a remaining maturity of at least one year and, if governed by a non-EU law, they must be able to be written down or converted by the resolution authority of a Member State under that law or through contractual provisions.

The MREL requirement came into force on January 1, 2016. However, the EBA has recognized the impact which this requirement may have on banks’ funding structures and costs, and the MREL Delegated Regulation states that the resolution authorities shall determine an appropriate transitional period but that this shall be as short as possible. As part of the EU Banking Reforms, the European Commission published on November 23, 2016 a Proposal for a Directive of the European Parliament and the Council on amendments to the BRRD as regards the ranking of unsecured debt instruments in the insolvency hierarchy (the “MREL Proposal”). The MREL Proposal proposes to harmonize national laws on recovery and resolution of credit institutions and investment firms, in particular as regards their loss-absorbency and recapitalization capacity in resolution, and proposes the creation of a new asset class of “non-preferred” senior debt that should only be bailed-in after other capital instruments but before other senior liabilities. The MREL Proposal anticipates that Member States will transpose the proposed amendments into the BRRD in their national laws by approximately June 2017 and that banks to which the amendments apply will have to comply with the amended rules by approximately July 2017.

The EU Banking Reforms establish the new conditions that would need to be met by an instrument so that it can be considered as an eligible liability and which would then be used to comply with MREL requirements. In addition, the EU Banking Reforms establish some exemptions which could allow outstanding senior debt

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instruments to be used to comply with MREL requirements. However, there is uncertainty regarding the final form of the EU Banking Reforms insofar as such eligibility is concerned and how those regulations and exemptions are to be interpreted and applied. This uncertainty may impact upon the ability of the Bank to comply with its MREL requirements (at both individual and consolidated levels) on due date.

On November 9, 2015, the FSB published its final Total Loss-Absorbing Capacity (“TLAC”) Principles and Term Sheet (the “TLAC Principles and Term Sheet”), proposing that G-SIBs maintain significant minimum amounts of liabilities that are subordinated (by law, contract or structurally) to certain prior-ranking liabilities, such as guaranteed insured deposits, and forming a new standard for G-SIBs. The TLAC Principles and Term Sheet contain a set of principles on loss-absorbing and recapitalization capacity of G-SIBs in resolution and a term sheet for the implementation of these principles in the form of an internationally agreed standard. The FSB will undertake a review of the technical implementation of the TLAC Principles and Term Sheet by the end of 2019. The TLAC Principles and Term Sheet require a minimum TLAC requirement to be determined individually for each G-SIB at the greater of (a) 16% of risk-weighted assets as of January 1, 2019 and 18% as of January 1, 2022, and (b) 6% of the Basel III Tier 1 leverage ratio exposure measured as of January 1, 2019, and 6.75% as of January 1, 2022. The Bank is no longer classified as a G-SIB by the FSB with effect from January 1, 2017. However, if the Bank were to be so classified in the future or if TLAC requirements as set out below are adopted and implemented in Spain and extended to non-G-SIBs through the imposition of similar MREL requirements, then this could create additional minimum requirements for the Bank.

In this regard, the EBA submitted on December 14, 2016 a final report on the implementation and design of the MREL framework (the “EBA MREL Report”), which contains a number of recommendations to amend the current MREL framework. Additionally, the EU Banking Reforms contain the legislative proposal of the European Commission for the amendment of the MREL framework and the implementation of the TLAC standards. The EU Banking Reforms propose the amendment of a number of aspects of the MREL framework to align it with the TLAC standards included in the TLAC Principles and Term Sheet. To maintain coherence between the MREL rules applicable to G-SIBs and those applicable to non-G-SIBs, the EU Banking Reforms also propose a number of changes to the MREL rules applicable to non-G-SIBs. While the EU Banking Reforms propose for a minimum harmonized or “Pillar 1” MREL requirement for G-SIBs, in the case of non-G-SIBs, it is proposed that MREL requirements will be imposed on a bank-specific basis. For G-SIBs, it is also proposed that a supplementary or “Pillar 2” MREL requirement may be further imposed on a bank-specific basis. The EU Banking Reforms further provide for the resolution authorities to give guidance to an institution to have own funds and eligible liabilities in excess of the requisite levels for certain purposes.

If the Relevant Spanish Resolution Authority finds that there could exist any obstacles to resolvability by the Bank and/or the Group, a higher MREL requirement could be imposed.

Neither the BRRD nor the MREL Delegated Regulation provides details on the implications of a failure by an institution to comply with its MREL requirement. However, the EU Banking Reforms propose that this be addressed by the relevant authorities on the basis of their powers to address or remove impediments to resolution, the exercise of their supervisory powers under the CRD IV Directive, early intervention measures, and administrative penalties and other administrative measures.

Furthermore, in accordance with the EBA MREL Report, the EBA recommends that resolution authorities and competent authorities should engage in active monitoring of compliance with their respective requirements and considers that (i) the powers of resolution authorities to respond to a breach of MREL should be enhanced (which would require resolution authorities to be given the power to require the preparation and execution of an MREL restoration plan, to use their powers to address impediments to resolvability, to request that distribution restrictions be imposed on an institution by a competent authority and to request a joint restoration plan in cases where an institution breaches both MREL and minimum capital requirements); (ii) competent authorities should also respond to breaches of minimum capital requirements and MREL; (iii) resolution authorities should assume a lead role in responding to a failure to issue or roll over MREL-eligible debt leading to a breach of MREL; (iv) if there are both losses and a failure to roll over or issue MREL-eligible debt, both the relevant resolution authority and relevant competent authority should attempt to agree on a joint restoration plan (provided that both authorities believe that the institution is not failing or likely to fail); and (v) resolution and competent authorities should closely cooperate

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and coordinate. The EU Banking Reforms also provide for resolution and competent authorities to consult each other in the exercise of their respective powers in relation to any breaches of MREL. In addition, under the EBA Guidelines on triggers for use of early intervention measures of May 8, 2015 a significant deterioration in the amount of eligible liabilities and own funds held by an institution for the purposes of meeting its MREL requirements may put an institution in a situation where conditions for early intervention are met, which may result in the application by the competent authority of early intervention measures.

Further, as outlined in the EBA MREL Report, the EBA’s recommendation is that an institution will not be able to use the same CET 1 capital to meet both MREL and the combined buffer requirements. In addition, the EU Banking Reforms provide that, in the case of the own funds of an institution that may otherwise contribute to the combined buffer requirement where there is any shortfall in MREL, this will be considered as a failure to meet the combined buffer requirement such that those own funds will automatically be used instead to meet that institution’s MREL requirement and will no longer count towards its combined buffer requirement. Accordingly, this could trigger a limit on discretionary payments (see “— Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations”). Additionally, if the Relevant Spanish Resolution Authority finds that there could exist any obstacles to resolvability by the Bank and/or the Group, a higher MREL requirement could be imposed.

Moreover, with respect to the EU Banking Reforms, there are uncertainties concerning how the subsidiaries of the Group would be treated for purposes of determining the resolution group of the Bank and the applicable MREL requirements, which may lead to a situation where the consolidated MREL requirement of the Bank would not fully reflect its multiple-point-of-entry resolution strategy.

Any failure by the Bank and/or the Group to comply with its MREL requirement may have a material adverse effect on the Bank’s business, financial conditions and results of operations and could result in the imposition of restrictions or prohibitions on discretionary payments by the Bank, including the payment of dividends and distributions relating to Additional Tier 1 instruments. There can also be no assurance as to the relationship between the “Pillar 2” additional own funds requirements, the “combined buffer requirement”, the MREL requirement once implemented in Spain and the restrictions or prohibitions on discretionary payments.

Increased taxation and other burdens imposed on the financial sector may have a material adverse effect on the Bank’s business, financial condition and results of operations

On February 14, 2013, the European Commission published a proposal (the “Commission’s Proposal”) for a Directive for a common financial transaction tax (“FTT”) in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the “participating Member States”). However, Estonia has since stated that it will not participate.

The Commission’s Proposal has very broad scope and could, if introduced, apply to certain dealings in securities issued by the Group or other issuers (including secondary market transactions) in certain circumstances.

Under the Commission’s Proposal, the FTT could apply in certain circumstances to persons both within and outside the participating Member States. Generally, it would apply to certain dealings in securities where at least one party is a financial institution and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State.

However, the FTT proposal remains subject to negotiation among the participating Member States. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU Member States may decide to participate and participating Member States may decide not to participate.

Royal Decree-Law 8/2014, of July 4, introduced a 0.03% tax on bank deposits in Spain. This tax is payable annually by Spanish banks. There can be no assurance that additional national or transnational bank levies or financial transaction taxes will not be adopted by the authorities of the jurisdictions where the Bank operates.

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Contributions for assisting in the future recovery and resolution of the Spanish banking sector may have a material adverse effect on the Bank’s business, financial condition and results of operations.

In 2015, Law 11/2015 and RD 1012/2015 established a requirement for Spanish credit institutions, including BBVA, to make at least an annual ordinary contribution to the National Resolution Fund (Fondo de Resolución Nacional), payable on request of the FROB. The total amount of contributions to be made to the National Resolution Fund by all Spanish banking entities must equal at least 1% of the aggregate amount of all deposits guaranteed by the Deposit Guarantee Fund by December 31, 2024. The contribution will be adjusted to the risk profile of each institution in accordance with the criteria set out in RD 1012/2015. The FROB may, in addition, collect extraordinary contributions.

Furthermore, Law 11/2015 also established in 2015 an additional charge (tasa) which shall be used to further fund the activities of the FROB, in its capacity as a resolution authority, which charge shall equal 2.5% of the above annual ordinary contribution to be made to the National Resolution Fund.

In addition, since 2016, the Bank has been required to make contributions directly to the EU Single Resolution Fund, once the National Resolution Fund has been integrated into it, and will have to pay supervisory fees to the SSM and the SRM. See “—Regulatory developments related to the EU fiscal and banking union may have a material adverse effect on the Bank’s business, financial condition and results of operations”.

Any levies, taxes or funding requirements imposed on the Bank pursuant to the foregoing or otherwise in any of the jurisdictions where it operates could have a material adverse effect on the Bank’s business, financial condition and results of operations.

Regulatory developments related to the EU fiscal and banking union may have a material adverse effect on the Bank’s business, financial condition and results of operations

The project of achieving a European banking union was launched in the summer of 2012. Its main goal is to resume progress towards the European single market for financial services by restoring confidence in the European banking sector and ensuring the proper functioning of monetary policy in the Eurozone.

Banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the SSM and the SRM.

The SSM is intended to assist in making the banking sector more transparent, unified and safer. In accordance with the SSM Framework Regulation, the ECB fully assumed its new supervisory responsibilities within the SSM, in particular the direct supervision of the largest European banks (including the Bank), on November 4, 2014.

The SSM represents a significant change in the approach to bank supervision at a European and global level, even if it is not expected to result in any radical change in bank supervisory practices in the short term. The SSM has resulted in the direct supervision by the ECB of the largest financial institutions, including the Bank, and indirect supervision of around 3,500 financial institutions. The new supervisor is one of the largest in the world in terms of assets under supervision. In the coming years, the SSM is expected to work to establish a new supervisory culture importing best practices from the 19 supervisory authorities that form part of the SSM. Several steps have already been taken in this regard, such as the publication of the Supervisory Guidelines and the creation of the SSM Framework Regulation. In addition, the SSM represents an extra cost for the financial institutions that fund it through payment of supervisory fees.

The other main pillar of the EU banking union is the SRM, the main purpose of which is to ensure a prompt and coherent resolution of failing banks in Europe at minimum cost. The SRM Regulation, which was passed on July 15, 2014 and took legal effect from January 1, 2015, establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of the SRM and a Single Resolution Fund. The new Single Resolution Board started operating on January 1, 2015 and fully assumed its resolution powers on January 1, 2016. The Single Resolution Fund has also been in place since January 1, 2016, funded by contributions from European banks in accordance with the methodology approved by the Council of the European

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Union. The Single Resolution Fund is intended to reach a total amount of €55 billion by 2024 and to be used as a separate backstop only after an 8% bail-in of a bank’s total liabilities including own funds has been applied to cover capital shortfalls (in line with the BRRD).

By allowing for the consistent application of EU banking rules through the SSM, the banking union is expected to help resume momentum toward economic and monetary union. In order to complete such union, a single deposit guarantee scheme is still needed, which may require a change to the existing European treaties. This is the subject of continued negotiation by European leaders to ensure further progress is made in European fiscal, economic and political integration.

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as the Bank’s main supervisory authority may have a material effect on the Bank’s business, financial condition and results of operations. In particular, the BRRD and Directive 2014/49/EU of the European Parliament and the Council of April 16, 2014 on deposit guarantee schemes were published in the Official Journal of the EU on June 12, 2014. The BRRD was implemented into Spanish law through Law 11/2015 and RD 1012/2015. In addition, on January 29, 2014, the European Commission released its proposal on the structural reforms of the European banking sector, which will impose new constraints on the structure of European banks. The proposal is aimed at ensuring the harmonization between the divergent national initiatives in Europe. It includes a prohibition on proprietary trading similar to that contained in Section 619 of the Dodd-Frank Act (also known as the Volcker Rule) and a mechanism to potentially require the separation of trading activities (including market-making), such as in the Financial Services (Banking Reform) Act 2013, complex securitizations and risky derivatives.

There can be no assurance that regulatory developments related to the EU fiscal and banking union, and initiatives undertaken at the EU level, will not have a material adverse effect on the Bank’s business, financial condition and results of operations.

The Group’s anti-money laundering and anti-terrorism policies may be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing

Group companies are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Although the Group believes that its current policies and procedures are sufficient to comply with applicable rules and regulations, it cannot guarantee that its anti-money laundering and anti-terrorism financing policies and procedures will not be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing. Any of such events may have severe consequences, including sanctions, fines and, notably, reputational consequences, which could have a material adverse effect on the Group’s financial condition and results of operations.

The Group is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs

The Group is required to comply with the laws and regulations of various jurisdictions where it conducts operations. In particular, its operations are subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the United Kingdom Bribery Act of 2010, and economic sanction programs, including those administered by the United Nations, the EU and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of the Bank’s business, the Bank may deal with entities the employees of which are considered government officials. In addition, economic sanctions programs restrict the Bank’s business dealings with certain sanctioned countries, individuals and entities.

Although the Bank has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that its employees, directors, officers, partners, agents and service providers will not take actions in

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violation of the Group’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which it or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties being imposed on the Bank, limits being placed on the Bank’s activities, the Bank’s authorizations and licenses being revoked, damage to the Bank’s reputation and other consequences that could have a material adverse effect on the Bank’s business, results of operations and financial condition. Further, litigation or investigations relating to alleged or suspected violations of anti-corruption laws and sanctions regulations could be costly.

Local regulation may have a material effect on the Bank’s business, financial condition, results of operations and cash flows

The Bank’s operations are subject to regulatory risks, including the effects of changes in laws, regulations, policies and interpretations, in the various jurisdictions outside Spain where it operates. Regulations in certain jurisdictions where the Bank operates differ in a number of material respects from equivalent regulations in Spain. For example, local regulations may require the Bank’s subsidiaries and affiliates to meet capital requirements that are different from those applicable to the Bank as a Spanish bank, they may prohibit certain activities permitted to be undertaken by the Bank in Spain or they may require certain approvals to be obtained in connection with such subsidiaries and affiliates’ activities. Changes in regulations may have a material effect on the Group’s business and operations, particularly changes affecting Mexico, the United States, Venezuela, Argentina or Turkey, which are the Group’s most significant jurisdictions by assets other than Spain.

Furthermore, the governments in certain regions where the Group operates have exercised, and continue to exercise, significant influence over the local economy. Governmental actions, including changes in laws or regulations or in the interpretation of existing laws or regulations, concerning the economy and state-owned enterprises, or otherwise affecting the Group’s activity, could have a significant effect on the private sector entities in general and on the Bank’s subsidiaries and affiliates in particular. In addition, the Group’s activities in emerging economies, such as Venezuela, are subject to a heightened risk of changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps, exchange controls, government restrictions on dividends and tax policies. Any of these risks could have a material adverse effect on the Group’s business, financial condition and results of operations.

Liquidity and Financial Risks

The Bank has a continuous demand for liquidity to fund its business activities. The Bank may suffer during periods of market-wide or firm-specific liquidity constraints, and liquidity may not be available to it even if its underlying business remains strong

Liquidity and funding continue to remain a key area of focus for the Group and the industry as a whole. Like all major banks, the Group is dependent on confidence in the short- and long-term wholesale funding markets. Should the Group, due to exceptional circumstances or otherwise, be unable to continue to source sustainable funding, its ability to fund its financial obligations could be affected.

The Bank’s profitability or solvency could be adversely affected if access to liquidity and funding is constrained or made more expensive for a prolonged period of time. Under extreme and unforeseen circumstances, such as the closure of financial markets and uncertainty as to the ability of a significant number of firms to ensure they can meet their liabilities as they fall due, the Group’s ability to meet its financial obligations as they fall due or to fulfill its commitments to lend could be affected through limited access to liquidity (including government and central bank facilities). In such extreme circumstances, the Group may not be in a position to continue to operate without additional funding support, which it may be unable to access. These factors may have a material adverse effect on the Group’s solvency, including its ability to meet its regulatory minimum liquidity requirements. These risks can be exacerbated by operational factors such as an over-reliance on a particular source of funding or changes in credit ratings, as well as market-wide phenomena such as market dislocation, regulatory change or major disasters.

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In addition, corporate and institutional counterparties may seek to reduce aggregate credit exposures to the Bank (or to all banks), which could increase the Group’s cost of funding and limit its access to liquidity. The funding structure employed by the Group may also prove to be inefficient, thus giving rise to a level of funding cost where the cumulative costs are not sustainable over the longer term. The funding needs of the Group may increase and such increases may be material to the Group’s business, financial condition and results of operations.

Withdrawals of deposits or other sources of liquidity may make it more difficult or costly for the Group to fund its business on favorable terms or cause the Group to take other actions

Historically, one of the Group’s principal sources of funds has been savings and demand deposits. Large-denomination time deposits may, under some circumstances, such as during periods of significant interest-rate-based competition for these types of deposits, be a less stable source of deposits than savings and demand deposits. The level of wholesale and retail deposits may also fluctuate due to other factors outside the Group’s control, such as a loss of confidence (including as a result of political initiatives, including bail-in and/or confiscation and/or taxation of creditors’ funds) or competition from investment funds or other products. The recent introduction of a national tax on outstanding deposits could be negative for the Group’s activities in Spain. Moreover, there can be no assurance that, in the event of a sudden or unexpected withdrawal of deposits or shortage of funds in the banking systems or money markets in which the Group operates, the Group will be able to maintain its current levels of funding without incurring higher funding costs or having to liquidate certain of its assets. In addition, if public sources of liquidity, such as the ECB extraordinary measures adopted in response to the financial crisis since 2008, are removed from the market, there can be no assurance that the Group will be able to maintain its current levels of funding without incurring higher funding costs or having to liquidate certain of its assets or taking additional deleverage measures.

Implementation of internationally accepted liquidity ratios might require changes in business practices that affect the profitability of the Bank’s business activities

The liquidity coverage ratio (“LCR”) is a quantitative liquidity standard developed by the BCBS to ensure that those banking organizations to which this standard is to apply have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The final standard was announced in January 2013 by the BCBS and, since January 2015, is being phased-in until 2019. Currently the banks to which this standard applies must comply with a minimum LCR requirement of 70% and gradually increase the ratio by 10 percentage points per year to reach 100% by January 2019.

The BCBS’s net stable funding ratio (“NSFR”) has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their on- and off-balance sheet activities that reduces the likelihood that disruptions to a bank’s regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure. The BCBS contemplates that the NSFR, including any revisions, will be implemented by member countries as a minimum standard by January 1, 2018, with no phase-in scheduled. The EU Banking Reforms propose the introduction of a harmonized binding requirement for the NSFR across the EU that will apply two years after the date of entry into force of the amending regulation at a level of 100%.

Various elements of the LCR and the NSFR, as they are implemented by national banking regulators and complied with by the Bank, may cause changes that affect the profitability of business activities and require changes to certain business practices, which could expose the Bank to additional costs (including increased compliance costs) or have a material adverse effect on the Bank’s business, financial condition or results of operations. These changes may also cause the Bank to invest significant management attention and resources to make any necessary changes.

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The Group’s businesses are subject to inherent risks concerning borrower and counterparty credit quality which have affected and are expected to continue to affect the recoverability and value of assets on the Group’s balance sheet

The Group has exposures to many different products, counterparties and obligors and the credit quality of its exposures can have a significant effect on the Group’s earnings. Adverse changes in the credit quality of the Group’s borrowers and counterparties or collateral, or in their behavior or businesses, may reduce the value of the Group’s assets, and materially increase the Group’s write-downs and provisions for impairment losses. Credit risk can be affected by a range of factors, including an adverse economic environment, reduced consumer and/or government spending, global economic slowdown, changes in the rating of individual counterparties, the debt levels of individual contractual counterparties and the economic environment they operate in, increased unemployment, reduced asset values, increased personal or corporate insolvency levels, reduced corporate profits, changes (and the timing, quantum and pace of these changes) in interest rates, counterparty challenges to the interpretation or validity of contractual arrangements and any external factors of a legislative or regulatory nature. In recent years, the global economic crisis has driven cyclically high bad debt charges.

Non-performing or low credit quality loans have in the past and can continue to negatively affect the Bank’s results of operations. The Bank cannot assure that it will be able to effectively control the level of the impaired loans in its total loan portfolio. At present, default rates are partly cushioned by low rates of interest which have improved customer affordability, but the risk remains of increased default rates as interest rates start to rise. The timing, quantum and pace of any rise is a key risk factor. All new lending is dependent on the Group’s assessment of each customer’s ability to pay, and there is an inherent risk that the Group has incorrectly assessed the credit quality or willingness of borrowers to pay, possibly as a result of incomplete or inaccurate disclosure by those borrowers or as a result of the inherent uncertainty that is involved in the exercise of constructing models to estimate the true risk of lending to counterparties. The Group estimates and establishes reserves for credit risks and potential credit losses inherent in its credit exposure. This process, which is critical to the Group’s results and financial condition, requires difficult, subjective and complex judgments, including forecasts of how macro-economic conditions might impair the ability of borrowers to repay their loans. As is the case with any such assessments, there is always a risk that the Group will fail to adequately identify the relevant factors or that it will fail to estimate accurately the effect of these identified factors, which could have a material adverse effect on the Group’s business, financial condition or results of operations.

The Group’s business is particularly vulnerable to volatility in interest rates

The Group’s results of operations are substantially dependent upon the level of its net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Interest rates are highly sensitive to many factors beyond the Group’s control, including fiscal and monetary policies of governments and central banks, regulation of the financial sectors in the markets in which it operates, domestic and international economic and political conditions and other factors. Changes in market interest rates, including cases of negative reference rates, can affect the interest rates that the Group receives on its interest-earning assets differently to the rates that it pays for its interest-bearing liabilities. This may, in turn, result in a reduction of the net interest income the Group receives, which could have a material adverse effect on its results of operations.

In addition, the high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to changes in interest rates. In addition, a rise in interest rates could reduce the demand for credit and the Group’s ability to generate credit for its clients, as well as contribute to an increase in the credit default rate. As a result of these and the above factors, significant changes or volatility in interest rates could have a material adverse effect on the Group’s business, financial condition or results of operations.

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The Group has a substantial amount of commitments with personnel considered wholly unfunded due to the absence of qualifying plan assets

The Group’s commitments with personnel which are considered to be wholly unfunded are recognized under the heading “Provisions—Provisions for Pensions and Similar Obligations” in its consolidated balance sheets included in the Consolidated Financial Statements. For more information please see Note 25 to the Consolidated Financial Statements.

The Group faces liquidity risk in connection with its ability to make payments on its unfunded commitments with personnel, which it seeks to mitigate, with respect to post-employment benefits, by maintaining insurance contracts which were contracted with insurance companies owned by the Group. The insurance companies have recorded in their balance sheets specific assets (fixed interest deposit and bonds) assigned to the funding of these commitments. The insurance companies also manage derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. The Group seeks to mitigate liquidity risk with respect to early retirements and post-employment welfare benefits through oversight by the Assets and Liabilities Committee (“ALCO”) of the Group. The Group’s ALCO manages a specific asset portfolio to mitigate the liquidity risk resulting from the payments of these commitments. These assets are government and covered bonds which are issued at fixed interest rates with maturities matching the aforementioned commitments. The Group’s ALCO also manages derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. Should BBVA fail to adequately manage liquidity risk and interest rate risk either as described above or otherwise, it could have a material adverse effect on the Group’s business, financial condition and results of operations.

The Bank is dependent on its credit ratings and any reduction of its credit ratings could materially and adversely affect the Group’s business, financial condition and results of operations

The Bank is rated by various credit rating agencies. The Bank’s credit ratings are an assessment by rating agencies of its ability to pay its obligations when due. Any actual or anticipated decline in the Bank’s credit ratings to below investment grade or otherwise may increase the cost of and decrease the Group’s ability to finance itself in the capital markets, secured funding markets (by affecting its ability to replace downgraded assets with better-rated ones), or interbank markets, through wholesale deposits or otherwise, harm its reputation, require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, and make third parties less willing to transact business with the Group or otherwise materially adversely affect its business, financial condition and results of operations. Furthermore, any decline in the Bank’s credit ratings to below investment grade or otherwise could breach certain agreements or trigger additional obligations under such agreements, such as a requirement to post additional collateral, which could materially adversely affect the Group’s business, financial condition and results of operations.

Highly-indebted households and corporations could endanger the Group’s asset quality and future revenues

In recent years, households and businesses have reached a high level of indebtedness, particularly in Spain, which has created increased risk in the Spanish banking system. In addition, the high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to upward movements in interest rates and the profitability of the loans more vulnerable to interest rate decreases. Highly indebted households and businesses are less likely to be able to service debt obligations as a result of adverse economic events, which could have an adverse effect on the Group’s loan portfolio and, as a result, on its financial condition and results of operations. Moreover, the increase in households’ and businesses’ indebtedness also limits their ability to incur additional debt, reducing the number of new products that the Group may otherwise be able to sell to them and limiting the Group’s ability to attract new customers who satisfy its credit standards, which could have an adverse effect on the Group’s ability to achieve its growth plans.

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The Group depends in part upon dividends and other funds from subsidiaries

Some of the Group’s operations are conducted through its financial services subsidiaries. As a result, the Bank’s ability to pay dividends, to the extent the Bank decides to do so, depends in part on the ability of the Group’s subsidiaries to generate earnings and to pay dividends to BBVA. Payment of dividends, distributions and advances by the Group’s subsidiaries will be contingent upon their earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. For instance, the repatriation of dividends from the Group’s Venezuelan and Argentinean subsidiaries have been subject to certain restrictions and there is no assurance that further restrictions will not be imposed. Additionally, the Bank’s right to receive any assets of any of the Group’s subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of subsidiaries’ creditors, including trade creditors. The Group also has to comply with increased capital requirements, which could result in the imposition of restrictions or prohibitions on discretionary payments including the payment of dividends (see “—Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations”).

Business and Industry Risks

The Group faces increasing competition in its business lines

The markets in which the Group operates are highly competitive and this trend will likely continue with new business models likely to be developed in coming years which impact is unforeseeable. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which the Group must now compete.

The Group also faces competition from non-bank competitors, such as payment platforms, e-commerce businesses, department stores (for some credit products), automotive finance corporations, leasing companies, factoring companies, mutual funds, pension funds, insurance companies, and public debt.

There can be no assurance that this competition will not adversely affect the Group’s business, financial condition and results of operations.

The Group faces risks related to its acquisitions and divestitures

The Group’s mergers and acquisitions activity involves divesting its interests in some businesses and strengthening other business areas through acquisitions. The Group may not complete these transactions in a timely manner, on a cost-effective basis or at all. Even though the Group reviews the companies it plans to acquire, it is generally not feasible for these reviews to be complete in all respects. As a result, the Group may assume unanticipated liabilities, or an acquisition may not perform as well as expected. In addition, transactions such as these are inherently risky because of the difficulties of integrating people, operations and technologies that may arise. There can be no assurance that any of the businesses the Group acquires can be successfully integrated or that they will perform well once integrated. Acquisitions may also lead to potential write-downs due to unforeseen business developments that may adversely affect the Group’s results of operations.

The Group’s results of operations could also be negatively affected by acquisition or divestiture-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets. The Group may be subject to litigation in connection with, or as a result of, acquisitions or divestitures, including claims from terminated employees, customers or third parties, and the Group may be liable for future or existing litigation and claims related to the acquired business or divestiture because either the Group is not indemnified for such claims or the indemnification is insufficient. These effects could cause the Group to incur significant expenses and could materially adversely affect its business, financial condition and results of operations.

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The Group is party to lawsuits, tax claims and other legal proceedings

Due to the nature of the Group’s business, the Bank and its subsidiaries are involved in litigation, arbitration and regulatory proceedings in jurisdictions around the world, the financial outcome of which is unpredictable, particularly where the claimants seek unspecified or undeterminable damages, or where the cases argue novel legal theories, involve a large number of parties or are at early stages of discovery. An adverse outcome or settlement in these proceedings could result in significant costs and may have a material adverse effect on the Group’s business, financial condition, cash flows, results of operations and reputation.

In addition, responding to the demands of litigation may divert management’s time and attention and financial resources. While the Group has provisioned such risks based on its assessment of such matters and in accordance with applicable accounting rules, it is possible that losses resulting from such risks, if proceedings are decided in whole or in part adversely to the Group, could exceed the amount of provisions made for such risks, which, in turn, could have a material adverse effect on the Group’s business, financial condition and results of operations. See “Item 8. Financial information—Consolidated Statements and Other Financial Information—Legal proceedings” and Note 24 to the Bank’s Consolidated Financial Statements for additional information on the Group’s legal, regulatory and arbitration proceedings.

The Group’s ability to maintain its competitive position depends significantly on its international operations, which expose the Group to foreign exchange, political and other risks in the countries in which it operates, which could cause an adverse effect on its business, financial condition and results of operations

The Group operates commercial banks and insurance and other financial services companies in various countries and its overall success as a global business depends upon its ability to succeed in differing economic, social and political conditions. The Group is particularly sensitive to developments in Mexico, the United States, Turkey and Argentina, which represented 12.63%, 11.42%, 11.61% and 1.25% of the Group’s assets as at December 31, 2016, respectively.

The Group is confronted with different legal and regulatory requirements in many of the jurisdictions in which it operates. See “— Legal, Regulatory and Compliance Risks—Local regulation may have a material effect on the Bank’s business, financial condition, results of operations and cash flows”. These include, but are not limited to, different tax regimes and laws relating to the repatriation of funds or nationalization or expropriation of assets. The Group’s international operations may also expose it to risks and challenges which its local competitors may not be required to face, such as exchange rate risk, difficulty in managing a local entity from abroad, political risk which may be particular to foreign investors and limitations on the distribution of dividends.

The Group’s presence in locations such as the Latin American markets or Turkey requires it to respond to rapid changes in market conditions in these countries and exposes the Group to increased risks relating to emerging markets. See “— Macroeconomic Risks—The Group may be materially adversely affected by developments in the emerging markets where it operates”. There can be no assurance that the Group will succeed in developing and implementing policies and strategies that are effective in each country in which it operates or that any of the foregoing factors will not have a material adverse effect on its business, financial condition and results of operations.

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Financial, Reporting and Other Operational Risks

Weaknesses or failures in the Group’s internal processes, systems and security could materially adversely affect its results of operations, financial condition or prospects, and could result in reputational damage

Operational risks, through inadequate or failed internal processes, systems (including financial reporting and risk monitoring processes) or security, or from people-related or external events, including the risk of fraud and other criminal acts carried out by Group employees or against Group companies, are present in the Group’s businesses. These businesses are dependent on processing and reporting accurately and efficiently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to a number of different legal and regulatory regimes. Any weakness in these internal processes, systems or security could have an adverse effect on the Group’s results, the reporting of such results, and on the ability to deliver appropriate customer outcomes during the affected period. In addition, any breach in security of the Group’s systems could disrupt its business, result in the disclosure of confidential information and create significant financial and legal exposure for the Group. Although the Group devotes significant resources to maintain and regularly update its processes and systems that are designed to protect the security of its systems, software, networks and other technology assets, there is no assurance that all of its security measures will provide absolute security. Any damage to the Group’s reputation (including to customer confidence) arising from actual or perceived inadequacies, weaknesses or failures in its systems, processes or security could have a material adverse effect on its business, financial condition and results of operations.

The financial industry is increasingly dependent on information technology systems, which may fail, may not be adequate for the tasks at hand or may no longer be available

Banks and their activities are increasingly dependent on highly sophisticated information technology (“IT”) systems. IT systems are vulnerable to a number of problems, such as software or hardware malfunctions, computer viruses, hacking and physical damage to vital IT centers. IT systems need regular upgrading and banks, including the Bank, may not be able to implement necessary upgrades on a timely basis or upgrades may fail to function as planned. Furthermore, failure to protect financial industry operations from cyber-attacks could result in the loss or compromise of customer data or other sensitive information. These threats are increasingly sophisticated and there can be no assurance that banks will be able to prevent all breaches and other attacks on its IT systems. In addition to costs that may be incurred as a result of any failure of IT systems, banks, including the Bank, could face fines from bank regulators if they fail to comply with applicable banking or reporting regulations.

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BBVA’s financial statements and periodic disclosure under securities laws may not give you the same information as financial statements prepared under U.S. accounting rules and periodic disclosures provided by domestic U.S. issuers

Publicly available information about public companies in Spain is generally less detailed and not as frequently updated as the information that is regularly published by or about listed companies in the United States. In addition, although BBVA is subject to the periodic reporting requirements of the Exchange Act, the periodic disclosure required of foreign private issuers such as BBVA under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Finally, BBVA maintains its financial accounts and records and prepares its financial statements in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB, which differs in certain respects from U.S. GAAP, the financial reporting standard to which many investors in the United States may be more accustomed.

The Bank’s financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of its operations and financial position

The preparation of financial statements in accordance with IFRS-IASB requires the use of estimates. It also requires management to exercise judgment in applying relevant accounting policies. The key areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the consolidated and individual financial statements, include credit impairment charges for amortized cost assets, impairment and valuation of available-for-sale investments, calculation of income and deferred tax, fair value of financial instruments, valuation of goodwill and intangible assets, valuation of provisions and accounting for pensions and post-retirement benefits. There is a risk that if the judgment exercised or the estimates or assumptions used subsequently turn out to be incorrect then this could result in significant loss to the Group, beyond that anticipated or provided for, which could have an adverse effect on the Group’s business, financial condition and results of operations.

Observable market prices are not available for many of the financial assets and liabilities that the Group holds at fair value and a variety of techniques to estimate the fair value are used. Should the valuation of such financial assets or liabilities become observable, for example as a result of sales or trading in comparable assets or liabilities by third parties, this could result in a materially different valuation to the current carrying value in the Group’s financial statements.

The further development of standards and interpretations under IFRS-IASB could also significantly affect the results of operations, financial condition and prospects of the Group.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

BBVA’s predecessor bank, BBV, was incorporated as a limited liability company (a “sociedad anónima” or S.A.) under the Spanish Corporations Law on October 1, 1988. BBVA was formed following the merger of Argentaria into BBV, which was approved by the shareholders of each entity on December 18, 1999 and registered on January 28, 2000. It conducts its business under the commercial name “BBVA”. BBVA is registered with the Commercial Registry of Vizcaya (Spain). It has its registered office at Plaza de San Nicolás 4, Bilbao, Spain, 48005, and operates out of Calle Azul, 4, 28050, Madrid, Spain telephone number +34-91-374-6201. BBVA’s agent in the U.S. for U.S. federal securities law purposes is Banco Bilbao Vizcaya Argentaria, S.A. New York Branch (1345 Avenue of the Americas, 44th Floor, New York, New York 10105 (Telephone: 212-728-1660)). BBVA is incorporated for an unlimited term.

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Capital Expenditures

Our principal investments are financial investments in our subsidiaries and affiliates. The main capital expenditures from 2014 to the date of this Annual Report were the following:

2017

On March 22, 2017, we acquired 41,790,000,000 shares (in the aggregate) of Garanti (amounting to 9.95% of the total issued share capital of Garanti) from Doğuş Holding A.Ş. and Doğuş Araştırma Geliştirme ve Müşavirlik Hizmetleri A.Ş., under certain agreements entered into on February 21, 2017, at a purchase price of 7.95 Turkish Liras (“TL”) per share (approximately 3,322 million TL or €859 million in the aggregate).

Following the completion of this acquisition, the shareholding structure of Garanti is approximately as follows:

	Shareholders’ stakes
BBVA		49.85	%
Doğuş Holding A.Ş.		0.05	%
Rest		50.10	%
Total		100	%

2016

In 2016 there were no significant capital expenditures.

2015

Acquisition of an additional 14.89% of Garanti

On July 27, 2015, we acquired 62,538,000,000 shares (in the aggregate) of Garanti from Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, under certain agreements entered into on November 19, 2014. The total price effectively paid by BBVA amounted to 8.765 TL per batch of 100 shares, amounting to approximately TL 5,481 million and €1,857 million applying a 2.9571 TL/EUR exchange rate.

Following this acquisition, we held 39.90% of Garanti’s share capital and started to fully consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity. On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “— 2017” above.

In accordance with the IFRS-IASB accounting rules, at the date of achieving effective control over Garanti, BBVA had to measure at fair value its previously acquired stake of 25.01% in Garanti (classified as a joint venture accounted for under the equity method). This resulted in a negative impact in “Gains (losses) on derecognition of non-financial assets and subsidiaries, net” in the consolidated income statement of the BBVA Group for the year ended December 31, 2015, which resulted, in turn, in a net negative impact in the “Profit attributable to parent company” of the BBVA Group in 2015 amounting to €1,840 million. Such accounting impact did not result in any additional cash outflow from BBVA. Most of this impact resulted from the depreciation of the TL against the Euro since the acquisition by BBVA of such stake until the date of achieving such effective control.

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Acquisition of Catalunya Banc

On April 24, 2015, once the necessary authorizations had been obtained and all the agreed conditions precedent had been fulfilled, BBVA announced the acquisition of 1,947,166,809 shares of Catalunya Banc, S.A. (“Catalunya Banc”) (approximately 98.4% of its share capital) for a price of approximately €1,165 million.

Previously, on July 21, 2014, the Management Commission of the FROB had accepted BBVA’s bid in the competitive auction for the acquisition of Catalunya Banc.

2014

In 2014 there were no significant capital expenditures.

Capital Divestitures

Our principal divestitures are financial divestitures in our subsidiaries and in affiliates. The main capital divestitures from 2014 to the date of this Annual Report were the following:

2016

In 2016 there were no significant capital divestitures.

2015

Sale of the participation in Citic International Financial Holdings Limited (CIFH)

On December 23, 2014, the BBVA Group signed an agreement to sell its 29.68% participation in Citic International Financial Holdings Limited ( “CIFH”) to China CITIC Bank Corporation Limited (“CNCB”). CIFH is a non-listed subsidiary of CNCB domiciled in Hong Kong. On August 27, 2015, BBVA completed the sale of this participation. The selling price of HK$8,162 million was registered under “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations”.

Partial sale of China CITIC Bank Corporation Limited (CNCB)

On January 23, 2015, the BBVA Group signed an agreement to sell a 4.9% stake in CNCB to UBS AG, London Branch (UBS), which in turn entered into transactions pursuant to which such CNCB shares were to be transferred to a third party, with the ultimate economic benefit of ownership of such CNCB shares being transferred to Xinhu Zhongbao Co., Ltd (Xinhu) (collectively, the “Relevant Transactions”). On March 12, 2015, after having obtained the necessary approvals, BBVA completed the sale. The selling price to UBS was HK$5.73 per share, amounting to a total of HK$13,136 million, equivalent to approximately €1,555 million (with an exchange rate of €/HK$=8.45 as of the date of the closing).

In addition to the sale of this 4.9% stake, the BBVA Group made various sales of CNCB shares in the market during 2015. In total, a participation of 6.34% in CNCB was sold during 2015. The impact of these sales on the Consolidated Financial Statements of the BBVA Group was a gain, net of taxes, of approximately €705 million in 2015. This gain, gross of taxes, was recognized under “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” in the consolidated income statement for 2015. See Note 50 to our Consolidated Financial Statements for additional information.

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2014

In 2014 there were no significant capital divestitures.

B. Business Overview

BBVA is a highly diversified international financial group, with strengths in the traditional banking businesses of retail banking, asset management, private banking and wholesale banking. We also have investments in some of Spain’s leading companies.

Operating Segments

Set forth below are the Group’s current seven operating segments:

• Banking Activity in Spain

• Real Estate Activity in Spain

• Turkey

• Rest of Eurasia

• Mexico

• South America

• United States

In addition to the operating segments referred to above, the Group has a Corporate Center which includes those items that have not been allocated to an operating segment. It includes the Group’s general management functions, including costs from central units that have a strictly corporate function; management of structural exchange rate positions carried out by the Financial Planning unit; specific issues of capital instruments to ensure adequate management of the Group’s overall capital position; proprietary portfolios such as holdings in some of Spain’s leading companies and their corresponding results; certain tax assets and liabilities; provisions related to commitments with pensioners; and goodwill and other intangibles. With respect to 2015, it also comprises the capital gains resulting from the sale of an aggregate 6.34% stake in CNCB, the effect of the valuation at fair value of the 25.01% initial stake held by BBVA in Garanti, the impact of the sale of BBVA’s 29.68% stake in CIFH and the negative goodwill generated from the acquisition of Catalunya Banc.

The information presented below as of and for the year ended December 31, 2014 has been recast to reflect our current operating segments (see “Presentation of Financial Information” and Note 6 to the Consolidated Financial Statements).

The breakdown of the Group’s total assets by operating segments as of December 31, 2016, 2015 and 2014 is as follows:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Banking Activity in Spain		332,642		339,775		318,431
Real Estate Activity in Spain		13,713		17,122		17,168
Turkey (1)		84,866		89,003		22,342
Rest of Eurasia		18,980		23,469		22,325
Mexico		93,318		99,594		93,834
South America		77,918		70,661		84,364
United States		88,902		86,454		69,261
Subtotal Assets by Operating Segment		710,339		726,079		627,765
Corporate Center and other adjustments (2)		21,517		23,776		4,177
Total Assets BBVA Group		731,856		749,855		631,942

36

⁽¹⁾  The information as of December 31, 2014 is presented under management criteria, pursuant to which Garanti’s assets and liabilities have been proportionally integrated based on our 25.01% interest in Garanti as of such dates. See Note 3 to the Consolidated Financial Statements.

⁽²⁾  As of December 31, 2014, other adjustments include adjustments made to account for the fact that, in the Consolidated Financial Statements, Garanti was previously accounted for using the equity method until the acquisition of an additional 14.89% rather than using the management criteria referred to above. As of December 31, 2015, there were some adjustments related to the ALCO management between the Corporate Center and the operating segments.

The following table sets forth information relating to the profit (loss) attributable to parent company by each of BBVA’s operating segments and Corporate Center for the years ended December 31, 2016, 2015 and 2014:

	Profit/(Loss) Attributable to Parent Company									% of Profit/(Loss) Attributable to Parent Company
	For the Year Ended December 31,
	2016			2015(1)			2014(1)			2016			2015(1)			2014(1)
	(In Millions of Euros)									(In Percentage)
Banking Activity in Spain		912			1,085			894			21.3			23.8			22.9
Real Estate Activity in Spain		(595	)		(496	)		(889	)		(13.9	)		(10.9	)		(22.8	)
Turkey (2)		599			371			310			14.0			8.2			8.0
Rest of Eurasia		151			75			255			3.5			1.6			6.5
Mexico		1,980			2,094			1,903			46.3			46.0			48.7
South America		771			905			1,001			18.0			19.9			25.6
United States		459			517			428			10.7			11.4			11.1
Subtotal operating segments		4,276			4,551			3,903			100.00			100.00			100.00
Corporate Center		(801	)		(1,910	)		(1,285	)
Profit attributable to parent company		3,475			2,642			2,618

⁽¹⁾  In the fourth quarter of 2015, certain operating expenses related to technology were reclassified from the Corporate Center to the Banking Activity in Spain segment. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015. In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect the reclassification of these expenses.

⁽²⁾  The information for the year ended December 31, 2014 and with respect to 2015, until July 2015, is presented under management criteria, pursuant to which Garanti’s results have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when the acquisition of an additional 14.89% stake in Garanti was completed and we started consolidating 100% of the Garanti group. See Note 3 to the Consolidated Financial Statements.

37

The following table sets forth information relating to the income of each operating segment for the years ended December 31, 2016, 2015 and 2014 and reconciles the income statement of the various operating segments to the consolidated income statement of the Group:

	Operating Segments
	Banking Activity in Spain		Real Estate Activity in Spain			Turkey (1)		Rest of Eurasia		Mexico		South America		United States		Corporate Center			Total		Adjustments (2) (4)			BBVA Group
	(In Millions of Euros)
2016
Net interest income		3,883		60			3,404		166		5,126		2,930		1,953		(461	)		17,059		—			17,059
Gross income		6,445		(6	)		4,257		491		6,766		4,054		2,706		(60	)		24,653		—			24,653
Net margin before provisions (3)		2,846		(130	)		2,519		149		4,371		2,160		863		(916	)		11,862		—			11,862
Operating profit /(loss) before tax		1,278		(743	)		1,906		203		2,678		1,552		612		(1,094	)		6,392		—			6,392
Profit		912		(595	)		599		151		1,980		771		459		(801	)		3,475		—			3,475
2015
Net interest income		4,001		71			2,194		183		5,387		3,202		1,811		(424	)		16,426		(404	)		16,022
Gross income		6,804		(28	)		2,434		473		7,081		4,477		2,631		(192	)		23,680		(318	)		23,362
Net margin before provisions (3)		3,358		(154	)		1,273		121		4,459		2,498		825		(1,017	)		11,363		(109	)		11,254
Operating profit /(loss) before tax		1,548		(716	)		853		111		2,772		1,814		685		(1,187	)		5,879		(1,276	)		4,603
Profit		1,085		(496	)		371		75		2,094		905		517		(1,910	)		2,642		—			2,642
2014
Net interest income		3,830		(34	)		735		189		4,906		4,699		1,443		(651	)		15,116		(734	)		14,382
Gross income		6,621		(211	)		944		736		6,513		5,191		2,137		(575	)		21,356		(631	)		20,725
Net margin before provisions (3)		3,585		(357	)		550		393		4,100		2,875		640		(1,380	)		10,405		(240	)		10,166
Operating profit /(loss) before tax		1,272		(1,275	)		392		320		2,508		1,951		561		(1,666	)		4,063		(83	)		3,980
Profit		894		(889	)		310		255		1,903		1,001		428		(1,285	)		2,618		—			2,618

⁽¹⁾ The information for the year ended December 31, 2014 and with respect to 2015, until July 2015, is presented under management criteria, pursuant to which Garanti’s results have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when the acquisition of an additional 14.89% stake in Garanti was completed and we started consolidating 100% of the Garanti group. See Note 3 to the Consolidated Financial Statements.

⁽²⁾ Other adjustments include adjustments made to account for the fact that, until July 2015, in the Consolidated Financial Statements Garanti was accounted for using the equity method rather than using the management criteria referred to above.

⁽³⁾ “Net margin before provisions” is calculated as “Gross income” less “Administration costs” and “Depreciation”.

⁽⁴⁾ In the fourth quarter of 2015, certain operating expenses related to technology were reclassified from the Corporate Center to the Banking Activity in Spain segment. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015. In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect the reclassification of these expenses.

38

The following tables set forth information relating to the balance sheet of the main operating segments as of December 31, 2016, 2015 and 2014:

	As of December 31,
	2016
	Banking Activity in Spain		Turkey		Rest of Eurasia		Mexico		South America		United States
	(In Millions of Euros)
Total Assets		332,642		84,866		18,980		93,318		77,918		88,902
Loans and advances to customers		187,313		57,941		15,709		47,938		50,333		62,000
Of which:
Residential mortgages		81,659		6,135		2,432		8,410		11,441		12,913
Consumer finance		7,075		13,860		231		11,286		10,527		7,412
Loans		5,308		8,925		217		6,630		7,781		6,837
Credit cards		1,767		4,935		15		4,656		2,745		575
Loans to enterprises		43,418		32,732		12,340		18,684		21,495		32,864
Loans to public sector		18,262		—		57		3,862		685		4,594
Total Liabilities		321,887		75,798		17,579		89,244		73,425		84,719
Customer deposits		177,143		47,244		12,796		50,571		47,684		65,760
Current and savings accounts		98,949		9,515		4,442		31,112		23,369		49,430
Time deposits		67,097		33,096		8,174		7,048		20,509		13,765
Other customer funds		5,164		—		107		5,324		4,456		—
Total Equity		10,755		9,068		1,401		4,074		4,493		4,183
	As of December 31, 2015
	Banking Activity in Spain		Turkey		Rest of Eurasia		Mexico		South America		United States
	(In Millions of Euros)
Total Assets		339,775		89,003		23,469		99,594		70,661		86,454
Loans and advances to customers		192,068		57,768		16,143		49,075		44,970		60,599
Of which:
Residential mortgages		85,029		6,215		2,614		9,099		9,810		13,182
Consumer finance		6,126		14,156		322		11,588		9,278		7,364
Loans		4,499		9,010		305		6,550		6,774		6,784
Credit cards		1,627		5,146		17		5,037		2,504		580
Loans to enterprises		43,149		31,918		12,619		18,160		19,896		31,882
Loans to public sector		20,798		—		216		4,197		630		4,442
Total Liabilities		329,195		83,246		22,319		93,413		66,287		82,413
Customer deposits		185,471		47,148		15,053		49,553		41,998		63,715
Current and savings accounts		81,218		9,697		5,031		32,165		21,011		45,717
Time deposits		78,403		33,695		9,319		7,049		16,990		14,456
Other customer funds		14,906		—		609		5,738		4,031		—
Total Equity		10,581		5,757		1,150		6,181		4,374		4,041

39

	As of December 31,
	2014
	Banking Activity in Spain		Turkey		Rest of Eurasia		Mexico		South America		United States
	(In Millions of Euros)
Total Assets		318,431		22,342		22,325		93,874		84,364		69,261
Loans and advances to customers		174,201		13,635		15,795		46,829		52,920		49,667
Of which:
Residential mortgages		74,508		1,413		2,779		9,272		9,622		11,876
Consumer finance		5,270		3,653		490		10,902		13,575		5,812
Loans		3,946		2,402		475		5,686		9,336		5,291
Credit cards		1,324		1,252		15		5,216		4,239		522
Loans to enterprises		37,224		7,442		11,119		16,707		20,846		25,202
Loans to public sector		22,833		—		234		4,295		650		3,706
Total Liabilities		309,216		21,839		19,138		45,937		78,395		66,052
Customer deposits		154,264		11,626		11,042		45,937		56,370		51,394
Current and savings accounts		61,437		2,151		3,221		28,014		35,268		38,863
Time deposits		70,521		7,860		7,341		28,014		16,340		11,231
Other customer funds		9,207		—		376		6,426		5,012		—
Total Equity		9,214		503		3,186		6,368		5,969		3,209

Banking Activity in Spain

The Banking Activity in Spain operating segment includes all of BBVA’s banking and non-banking businesses in Spain, other than those included in the Corporate Center area and Real Estate Activity in Spain. The main business units included in this operating segment are:

• Spanish Retail Network: including individual customers, private banking, small companies and businesses in the domestic market;

• Corporate and Business Banking (CBB): which manages small and medium sized enterprises (“SMEs”), companies and corporations, public institutions and developer segments;

• Corporate and Investment Banking (C&IB): responsible for business with large corporations and multinational groups and the trading floor and distribution business in Spain; and

• Other units: which include the insurance business unit in Spain (BBVA Seguros), and the Asset Management unit, which manages Spanish mutual funds and pension funds.

40

In addition, Banking Activity in Spain includes certain loans and advances portfolios, finance and structural euro balance sheet positions.

The following table sets forth information relating to the activity of this operating segment as of December 31, 2016, 2015 and 2014:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Total Assets		332,642		339,775		318,431
Loans and advances to customers		187,313		192,068		174,201
Of which:
Residential mortgages		81,659		85,029		74,508
Consumer finance		7,075		6,126		5,270
Loans		5,308		4,499		3,946
Credit cards		1,767		1,627		1,324
Loans to enterprises		43,418		43,149		37,224
Loans to public sector		18,262		20,798		22,833
Customer deposits		177,143		185,471		154,264
Of which:
Current and savings accounts		98,949		81,218		61,437
Time deposits		67,097		78,403		70,521
Other customer funds		5,164		14,906		9,207
Assets under management		56,147		54,504		50,497
Of which:
Mutual funds		32,648		31,484		28,444
Pension funds		23,448		22,897		21,879
Other placements		51		123		174

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €187,313 million, a 2.5% decrease compared with the €192,068 million recorded as of December 31, 2015, mainly as a result of a €3,370 million decrease in residential mortgages and, to a lesser extent, due to a €2,535 million decrease in loans to the public sector, partially offset by a €2,505 million increase in repurchase agreements and other loans.

Customer deposits of this operating segment as of December 31, 2016 amounted to €177,143 million, a 4.5% decrease compared with the €185,471 million recorded as of December 31, 2015, mainly due to the decrease in time deposits, partially offset by an increase in current and saving accounts.

Mutual funds of this operating segment as of December 31, 2016 amounted to €32,648 million, a 3.7% increase compared with the €31,484 million recorded as of December 31, 2015. mainly as a result of increased activity during the year, encouraged by the low return on deposits and the improvement of markets. Pension funds of this operating segment as of December 31, 2016 amounted to €23,448 million, a 2.4% increase compared with the €22,897 million recorded as of December 31, 2015.

This operating segment’s non-performing asset ratio decreased to 5.8% as of December 31, 2016, from 6.6% as of December 31, 2015, mainly due to the improvement in credit quality, as well as due to a strong rate of recoveries during 2016. This operating segment’s non-performing assets coverage ratio decreased to 53.4% as of December 31, 2016, from 59.5% as of December 31, 2015.

41

Real Estate Activity in Spain

This operating segment was set up with the aim of providing specialized and structured management of the real estate assets accumulated by the Group as a result of the economic crisis in Spain. It includes primarily lending to real estate developers and foreclosed real estate assets.

The Group’s exposure to the real estate sector in Spain, including loans and advances to customers and foreclosed assets, has declined over recent years. As of December 31, 2016, the balance stood at €10,307 million, 16.8% lower than as of December 31, 2015. Non-performing assets of this segment have continued to decline and as of December 31, 2016 were 12.4% lower than as of December 31, 2015. The coverage of non-performing and potential problem loans of this segment decreased to 59.4% as of December 31, 2016, compared with 63.4% as of December 31, 2015 of the total amount of real-estate assets in this operating segment.

The number of real estate assets sold amounted to 21,554 units in 2016, 2.2% higher than in 2015.

Turkey

This operating segment reflects BBVA’s stake in the Turkish bank Garanti. Following management criteria, assets and liabilities have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when we acquired an additional 14.89% and we began to fully consolidate the Garanti group. See “—History and Development of the Company—Capital expenditures—2017” for information on the new purchase agreement entered into with Doğuş Holding A.Ş. and Doğuş Araştirma Geliştirme ve Müşavirlik Hizmetleri A.Ş. on February 21, 2017.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Total Assets		84,866		89,003		22,342
Loans and advances to customers		57,941		57,768		13,635
Of which:
Residential mortgages		6,135		6,215		1,413
Consumer finance		13,860		14,156		3,653
Loans		8,925		9,010		2,402
Credit cards		4,935		5,146		1,252
Loans to enterprises		32,732		31,918		7,442
Loans to public sector		—		—		—
Customer deposits		47,244		47,148		11,626
Of which:
Current and savings accounts		9,515		9,697		2,151
Time deposits		33,096		33,695		7,860
Assets under management		3,753		3,620		882
Of which:
Mutual funds		1,192		1,243		344
Pension funds		2,561		2,378		538

42

During 2016, the Turkish lira depreciated against the euro in average terms from 3.0246 liras/€ in 2015 to 3.3427 liras/€ in 2016. In addition, there was a year-on-year depreciation of the Turkish lira from 3.1765 liras/€ as of December 31, 2015 to 3.7072 liras/€ as of December 31, 2016. The effect of these changes on exchange rates was negative for both the year-on-year comparison of the Group’s income statement and the year-on-year comparison of the Group’s balance sheet.

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €57,941 million, a 0.3% increase compared with the €57,768 million recorded as of December 31, 2015.

Customer deposits of this operating segment as of December 31, 2016 amounted to €47,244 million, a 0.2% increase compared with the €47,148 million recorded as of December 31, 2015.

Mutual funds of this operating segment as of December 31, 2016 amounted to €1,192 million, a 4.1% decrease compared with the €1,243 million recorded as of December 31, 2015, as a result of the depreciation of the Turkish lira. Excluding this impact, mutual funds of this operating segment increased 11.9% mainly due to the new agreement entered into with BlackRock for the management of foreign assets and other bilateral agreements which were signed with a number of distributors to actively market mutual funds. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Factors Affecting the Comparability of our Results of Operations and Financial Condition—Trends in Exchange Rates” for an explanation on how we have excluded the impact of changes in exchange rates.

Pension funds of this operating segment as of December 31, 2016 amounted to €2,561 million, a 7.7% increase compared with the €2,378 million recorded as of December 31, 2015, as a result of the depreciation of the Turkish lira. Excluding this impact, pension funds in this operating segment increased 25.7% as a result of the positive performance.

This operating segment’s non-performing asset ratio decreased to 2.7% as of December 31, 2016 from 2.8% as of December 31, 2015. This operating segment’s non-performing assets coverage ratio decreased to 123.8% as of December 31, 2016 from 129.3% as of December 31, 2015.

Rest of Eurasia

This operating segment includes the retail and wholesale banking businesses carried out by the Group in Europe (primarily Portugal) and Asia, excluding Spain and Turkey.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Total Assets		18,980		23,469		22,325
Loans and advances to customers		15,709		16,143		15,795
Of which:
Residential mortgages		2,432		2,614		2,779
Consumer finance		231		322		490
Loans		217		305		475
Credit cards		15		17		15
Loans to enterprises		12,340		12,619		11,119
Loans to public sector		57		216		234
Customer deposits		12,796		15,053		11,042
Of which:
Current and savings accounts		4,442		5,031		3,224
Time deposits		8,174		9,319		7,341
Other customer funds		107		609		376
Assets under management		366		331		466
Of which:
Mutual funds		—		—		152
Pension funds		366		331		314

43

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €15,709 million, a 2.7% decrease compared with the €16,143 million recorded as of December 31, 2015, mainly as a result of the decrease in loans to companies and, to lesser extent, in loans to the public sector and in residential mortgages.

Customer deposits of this operating segment as of December 31, 2016 amounted to €12,796 million, a 15.0% decrease compared with the €15,053 million recorded as of December 31, 2015, mainly as a result of a decline in the number of branches in Europe.

Pension funds of this operating segment as of December 31, 2016 amounted to €366 million, a 10.5% increase compared with the €331 million recorded as of December 31, 2015, mainly as a result of a positive performance of the funds portfolio.

This operating segment’s non-performing assets ratio increased to 2.7% as of December 31, 2016 from 2.5% as of December 31, 2015. This operating segment’s non-performing assets coverage ratio decreased to 84.3%. as of December 31, 2016 from 96.4% as of December 31, 2015.

Mexico

The Mexico operating segment comprises the banking and insurance businesses conducted in Mexico by the BBVA Bancomer financial group.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Total Assets		93,318		99,594		93,874
Loans and advances to customers		47,938		49,075		46,829
Of which:
Residential mortgages		8,410		9,099		9,272
Consumer finance		11,286		11,588		10,902
Loans		6,630		6,550		5,686
Credit cards		4,656		5,037		5,216
Loans to enterprises		18,684		18,160		16,707
Loans to public sector		3,862		4,197		4,295
Customer deposits		50,571		49,553		45,937
Of which:
Current and savings accounts		31,112		32,165		28,014
Time deposits		7,048		7,049		6,426
Other customer funds		5,324		5,738		6,537
Assets under management		23,715		21,557		22,094
Of which:
Mutual funds		16,331		17,894		18,691
Other placements		7,384		3,663		3,403

44

The Mexican peso depreciated against the euro as of December 31, 2016 compared with December 31, 2015, negatively affecting the business activity of the Mexico operating segment as of December 31, 2016 expressed in euro. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Factors Affecting the Comparability of our Results of Operations and Financial Condition—Trends in Exchange Rates”.

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €47,938 million, a 2.3% decrease compared with the €49,075 million recorded as of December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €3,945million). Excluding this impact, the change in loans and advances to customers was mainly due to an increase in loans to enterprises and, to a lesser extent, an increase in consumer loans, partially offset by a decrease in repurchase agreements and other loans.

Customer deposits of this operating segment as of December 31, 2016 amounted to €50,571 million, a 2.1% increase compared with the €49,553 million recorded as of December 31, 2015 mainly as a result of an overall increase in most product lines, partially offset by the impact of the depreciation of the Mexican peso.

Mutual funds of this operating segment as of December 31, 2016 amounted to €16,331 million, an 8.7% decrease compared with €17,894 million recorded as of December 31, 2015, mainly due to the depreciation of the Mexican peso. Excluding the impact of the depreciation of the Mexican peso there was an increase of 5.1%.

This operating segment’s non-performing assets ratio decreased to 2.3% as of December 31, 2016, from 2.6% as of December 31, 2015. This operating segment non-performing assets coverage ratio increased to 127% as of December 31, 2016, from 121% as of December 31, 2015.

South America

The South America operating segment includes the BBVA Group’s banking and insurance businesses in the region.

The business units included in the South America operating segment are:

• Retail and Corporate Banking: includes banks in Argentina, Chile, Colombia, Paraguay, Peru, Uruguay and Venezuela.

• Insurance: includes insurance businesses in Argentina, Chile, Colombia and Venezuela.

45

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Total Assets		77,918		70,661		84,364
Loans and advances to customers		50,333		44,970		52,920
Of which:
Residential mortgages		11,441		9,810		9,622
Consumer finance		10,527		9,278		13,575
Loans		7,781		6,774		9,336
Credit cards		2,745		2,504		4,239
Loans to enterprises		21,495		19,896		20,846
Loans to public sector		685		630		650
Customer deposits		47,684		41,998		56,370
Of which:
Current and savings accounts		23,369		21,011		35,268
Time deposits		20,509		16,990		16,340
Other customer funds		4,456		4,031		5,012
Assets under management		12,800		11,449		8,480
Of which:
Mutual funds		4,859		3,793		3,848
Pension funds		7,043		5,936		4,632

The period-end exchange rate against the euro of the currencies of the countries in which the BBVA Group operates in South America decreased, on average, in 2016, compared with December 2015, negatively affecting the business activity in South America. The depreciation of the Venezuelan bolivar as of December 31, 2016 was particularly significant. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Factors Affecting the Comparability of our Results of Operations and Financial Condition—Trends in Exchange Rates”.

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €50,333 million, a 11.9% increase compared with the €44,970 million recorded as of December 31, 2015, mainly as a result of an increase in residential mortgages. By country, the largest increase was registered in Colombia, where the increase in loans and advances to customers were partially offset by a negative exchange rate effect.

Customer deposits of this operating segment as of December 31, 2016 amounted to €47,684 million, a 13.5% increase compared with the €41,998 million recorded as of December 31, 2015, mainly as a result of a positive performance in time deposits in Argentina and Colombia, partially offset by a negative exchange rate effect.

Mutual funds of this operating segment as of December 31, 2016 amounted to €4,859 million, a 28.1% increase compared with the €3,793 million recorded as of December 31, 2015, mainly due to the positive performance in Argentina, Chile and Peru, which was partially offset by the significant depreciation of the Venezuelan bolivar.

Pension funds in this operating segment as of December 31, 2016 amounted to €7,043 million, an 18.6% increase from the €5,936 million recorded as of December 31, 2015, mainly as a result of increased volumes in Bolivia.

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This operating segment’s non-performing assets ratio increased to 2.9% as of December 31, 2016, from 2.3% as of December 31, 2015, due to the weaker economic conditions in the region. This operating segment non-performing assets coverage ratio decreased to 103% as of December 31, 2016, from 123% as of December 31, 2015.

United States

This operating segment encompasses the Group’s business in the United States. BBVA Compass accounted for approximately 98% of the operating segment’s balance sheet as of December 31, 2016. Given its size in this segment, most of the comments below refer to BBVA Compass. This operating segment also includes the assets and liabilities of the BBVA office in New York, which specializes in transactions with large corporations.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Total Assets		88,902		86,454		69,261
Loans and advances to customers		62,000		60,599		49,667
Of which:
Residential mortgages		12,913		13,182		11,876
Consumer finance		7,412		7,364		5,812
Loans		6,837		6,784		5,291
Credit cards		575		580		522
Loans to enterprises		32,864		31,882		25,202
Loans to public sector		4,594		4,442		3,706
Customer deposits		65,760		63,715		51,394
Of which:
Current and savings accounts		49,430		45,717		38,863
Time deposits		13,765		14,456		11,231

The U.S. dollar appreciated against the euro as of December 31, 2016 compared with December 31, 2015, positively affecting the business activity of the United States operating segment expressed in euro. See “Item 5. Operating and Financial Review and Prospects— Operating Results—Factors Affecting the Comparability of our Results of Operations and Financial Condition—Trends in Exchange Rates”.

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €62,000 million, a 2.3% increase compared with the €60,599 million recorded as of December 31, 2015, mainly as a result of the impact of the appreciation of the U.S. dollar. Excluding this impact, loans and advances to customers fell due to a decrease in residential mortgages and in consumer loans.

Customer deposits of this operating segment as of December 31, 2016 amounted to €65,760 million, a 3.2% increase compared with the €63,715 million recorded as of December 31, 2015, mainly as a result of the impact of the appreciation of the U.S. dollar. Excluding this positive impact, customer deposits decreased mainly due to a reduction in time deposits, partially offset by an increase in current and savings accounts.

This operating segment’s non-performing assets ratio increased to 1.5% as of December 31, 2016, from 0.9% as of December 31, 2015. This operating segment non-performing assets coverage ratio decreased to 94% as of December 31, 2016, from 151% as of December 31, 2015, mainly as a result of improvements in the Energy portfolio and by customers related to the oil and gas industry.

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Insurance Activity

See Note 23 to our Consolidated Financial Statements for information on our insurance activity.

Monetary Policy

The integration of Spain into the European Monetary Union (“EMU”) on January 1, 1999 implied the yielding of monetary policy sovereignty to the Eurosystem. The “Eurosystem” is composed of the ECB and the national central banks of the 19 member countries that form the EMU.

The Eurosystem determines and executes the policy for the single monetary union of the 19 member countries of the EMU. The Eurosystem collaborates with the central banks of member countries to take advantage of the experience of the central banks in each of its national markets. The basic tasks carried out by the Eurosystem include:

• defining and implementing the single monetary policy of the EMU;

• conducting foreign exchange operations in accordance with the set exchange policy;

• lending to national monetary financial institutions in collateralized operations;

• holding and managing the official foreign reserves of the member states; and

• promoting the smooth operation of the payment systems.

In addition, the Treaty on the EU (“EU Treaty”) establishes a series of rules designed to safeguard the independence of the system, in its institutional as well as its administrative functions.

Supervision and Regulation

Since September 2012, significant progress has been made toward the establishment of a European banking union. Banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the SSM and the SRM. As a further step to a fully-fledged banking union, in November 2015, the European Commission put forward a proposal for a European Deposit Insurance Scheme (EDIS), which intends to provide a stronger and more uniform degree of insurance cover for all retail depositors in the banking union.

Pursuant to Article 127(6) of the Treaty on the Functioning of the EU and the SSM Framework Regulation, the ECB is responsible for specific tasks concerning the prudential supervision of credit institutions established in participating Member States. Since 2014, it carries out these supervisory tasks within the SSM framework, composed of the ECB and the relevant national authorities. The ECB is responsible for the effective and consistent functioning of the SSM, with a view to carrying out effective banking supervision, contributing to the safety and soundness of the banking system and the stability of the financial system.

Its main aims are to:

• ensure the safety and soundness of the European banking system;

• increase financial integration and stability; and

• ensure consistent supervision.

The ECB, in cooperation with the relevant national supervisors, is responsible for the effective and consistent functioning of the SSM.

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It has the authority to:

• conduct supervisory reviews, on-site inspections and investigations;

• grant or withdraw banking licenses;

• assess banks’ acquisitions and disposals of qualifying holdings;

• ensure compliance with EU prudential rules; and

• set higher capital requirements (“buffers”) in order to counter any financial risks.

In addition, since November 2014, it assumed the direct supervision of the 123 significant banks of the participating countries, including Banco Bilbao Vizcaya Argentaria, S.A. These banks hold almost 82% of banking assets in the Eurozone. Ongoing supervision of the significant banks is carried out by Joint Supervisory Teams (“JSTs”). Each significant bank has a dedicated JST, comprising staff of the ECB and the relevant national supervisors (in our case, the Bank of Spain).

The criteria for determining whether a bank is considered significant (and therefore whether it falls under the ECB’s direct supervision) are set out in the SSM Framework Regulation and the Regulation (EU) No. 468/2014 of the European Central Bank of April 16, 2014 establishing the framework for cooperation within the SSM between the European Central Bank and national competent authorities and with national designated authorities (the “SSM Framework Regulation”). To qualify as significant, a bank must fulfill at least one of these criteria:

• size: the total value of its assets exceeds €30 billion;

• economic importance: for the specific country or the EU economy as a whole;

• cross border activities: the total value of its assets exceeds €5 billion and the ratio of its cross-border assets/liabilities in more than one other participating Member State to its total assets/liabilities is above 20%; or

• direct public financial assistance: it has requested or received funding from the European Stability Mechanism (the “ESM”) or the European Financial Stability Facility.

The ECB can decide at any time to classify a bank as significant to ensure that high supervisory standards are applied consistently.

The ECB indirectly supervises banks that are not considered significant (also known as “less significant” institutions), which continue to be supervised by their national supervisors, in close cooperation with the ECB. See “—Bank of Spain” below for an explanation of the tasks to be performed by the Bank of Spain.

Bank of Spain

The Bank of Spain was established in 1962 as a public law entity (entidad de derecho público) that operates as Spain’s autonomous central bank. In addition, it has the ability to function as a private bank. Except in its public functions, the Bank of Spain’s relations with third parties are governed by private law, and its actions are subject to the civil and business law codes and regulations.

Until January 1, 1999, the Bank of Spain was also the sole entity responsible for implementing Spanish monetary policy. For a description of monetary policy since the introduction of the euro, see “—Monetary Policy”.

Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the Eurosystem:

• defining and implementing the Eurosystem’s monetary policy, with the principal aim of maintaining price stability across the Eurozone;

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• conducting currency exchange operations consistent with the provisions of Article 219 of the EU Treaty, and holding and managing the Member States’ official currency reserves;

• promoting the sound working of payment systems in the Eurozone; and

• issuing legal tender banknotes.

Recognizing the foregoing functions as a fully-fledged member of the Eurosystem, the Bank of Spain Law of Autonomy (Ley de Autonomía del Banco de España) stipulates the performance of the following functions by the Bank of Spain:

• holding and managing currency and precious metal reserves not transferred to the ECB;

• promoting the proper working and stability of the financial system and, without prejudice to the functions of the ECB, the proper working of the national payment systems, providing emergency liquidity assistance (ELA);

• promoting the sound working and stability of the financial system and, without prejudice to the functions of the ECB, of national payment systems;

• placing coins in circulation and the performance, on behalf of the State, of all such other functions entrusted to it in this connection;

• preparing and publishing statistics relating to its functions, and assisting the ECB in the compilation of the necessary statistical information;

• providing treasury services and acting as financial agent for government debt;

• advising the government, preparing the appropriate reports and studies; and

• exercising all other powers attributed to it by legislation.

As indicated above, on November 4, 2014 the ECB assumed responsibility for the supervision of Eurozone banks, following a year-long preparatory phase that included an in-depth examination of the resilience and balance sheets of the largest banks in the Eurozone. For all the banks not supervised directly by the ECB, around 3,500 banks, the ECB will also set and monitor the relevant supervisory standards and work closely with the national competent authorities in the supervision of these banks.

The ECB has set up homogenous criteria for all the supervised institutions under the SSM and has assumed decision-making power. National authorities, such as the Bank of Spain, provide their knowledge on their financial systems and the entities located in their jurisdictions. Therefore, the role of the Bank of Spain continues to be relevant for financial entities located in Spain. In particular, the Bank of Spain’s tasks include the following:

• it collaborates with the ECB in the supervision of significant entities through its participation in the JSTs of the relevant Spanish banks, and has a leading role in the on-site inspections;

• the Bank of Spain supervises directly the less significant Spanish banks. The ECB’s indirect supervision of these entities is focused on the homogenization of supervisory criteria and reception of information;

• there are several supervisory competences over banking entities, for example money laundering and terrorist financing, customer protection and certain aspects of the monitoring of the financial markets that are out of the scope of the SSM and remain under the purview of the Bank of Spain;

• the Bank of Spain participates in certain administrative processes controlled by the ECB, such as the granting or withdrawal of licenses and the application of fit and proper tests to members of the board and senior management of Spanish banks, and supports the ECB in cross-border tasks such as the definition of policies, methodologies or crisis management;

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• the Bank of Spain continues to supervise other institution such as appraisal companies or specialist credit institutions, e-money issuing entities, mutual guarantee and re-guarantee companies; and

• the Bank of Spain participates in the governing bodies of the SSM contributing to the adoption of decisions affecting all credit institutions located in the Eurozone.

Single Resolution Fund

The Single Resolution Fund (the “Fund”) was established pursuant to Regulation (EU) No 806/2014 as a single financing arrangement for all the Member States participating in the SSM.

The Fund should be used in resolution procedures where the Single Resolution Board (“SRB”) considers it necessary to ensure the effective application of the resolution tools. The Fund should have adequate financial resources to allow for an effective functioning of the resolution framework by being able to intervene, where necessary, for the effective application of the resolution tools and to protect financial stability without recourse to taxpayers’ money.

The SRB should calculate the annual contributions to the Fund on the basis of a single target level established as 1% of the amount of covered deposits of all of the credit institutions authorized in all of the participating Member States. The SRB should ensure that the available financial means of the Fund reach at least the target level by the end of an initial period of eight years from January 1, 2016. The annual contribution to the Fund should be based on a flat contribution determined on the basis of an institution’s liabilities excluding own funds and covered deposits and a risk-adjusted contribution depending on the risk profile of that institution.

Deposit Guarantee Fund of Credit Institutions

The Deposit Guarantee Fund of Credit Institutions (Fondo de Garantía de Depósitos or “FGD”), which operates under the guidance of the Bank of Spain, was set up by virtue of Royal Decree-Law 16/2011, of October 14. It is an independent legal entity and enjoys full authority to fulfill its functions. Royal Decree-Law 16/2011 unified the three previous guarantee funds that existed in Spain: the Deposit Guarantee Fund of Saving Banks, the Deposit Guarantee Fund of Credit Entities and the Deposit Guarantee Fund of Banking Establishments.

The main objective of the FGD is to guarantee deposits and securities held by credit institutions, up to the limit of €100,000. It also has the authority to carry out any such actions necessary to reinforce the solvency and operation of credit institutions in difficulty, with the purpose of defending the interests of depositors and deposit guarantee funds.

In order to fulfill its purposes, the FGD receives annual contributions from member credit institutions. The current annual contribution requirement is €2 for every €1,000 guaranteed deposits held by the respective member institution as of year-end. The Minister of the Economy and Finance is authorized to reduce the contributions when the FGD’s equity is considered sufficient to meet its needs. Moreover, it may suspend contributions when the FGD’s total equity reaches 1% of the calculation base of the contributions of the member institutions as a whole. Under certain circumstances defined by law, there may be extraordinary contributions from the institutions, and the European Central Bank may also require exceptional contributions of an amount set by law.

As of December 31, 2016, 2015 and 2014 all of the Spanish banks belonging to the BBVA Group were members of the FGD and were thus obligated to make annual contributions to it.

Investment Guarantee Fund

Royal Decree 948/2001, of August 3, regulates investor guarantee schemes (Fondo de Garantía de Inversores) related to both investment firms and to credit institutions. These schemes are set up through an investment guarantee fund for securities broker and broker-dealer firms and the deposit guarantee funds already in place for credit institutions. A series of specific regulations have also been enacted, defining the system for contributing to the funds.

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The General Investment Guarantee Fund Management Company was created in a relatively short period of time and is a business corporation with capital in which all the fund members hold an interest. Member firms must make a joint annual contribution to the fund equal to 0.06% over the 5% of the securities that they hold on their client’s behalf. However, it is foreseen that these contributions may be reduced if the fund reaches a level considered to be sufficient.

Liquidity Requirements – Minimum Reserve Ratio

The legal framework for the minimum reserve ratio is set out in Regulation (EC) No. 2818/98 of the ECB of December 1, 1998 on the application of minimum reserves (ECB/1998/15). The reserve coefficient for overnight deposits, deposits with agreed maturity or period of notice up to two years, debt securities issued with maturity up to two years and money market paper is 1%. For deposits with agreed maturity or period of notice over two years, repos and debt securities issued with maturity over two years there is no required reserve coefficient.

Investment Ratio

In the past, the government used the investment ratio to allocate funds among specific sectors or investments. As part of the liberalization of the Spanish economy, it was gradually reduced to a rate of zero percent as of December 31, 1992. However, the law that established the ratio has not been abolished and the government could re-impose the ratio, subject to applicable EU requirements.

Capital Requirements

In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) proposed a number of fundamental reforms to the regulatory capital framework for internationally active banks (the “Basel III capital reforms”). The Basel III capital reforms raised the quantity and quality of capital required to be held by a financial institution with an emphasis on Common Equity Tier 1 capital (the “CET1 capital”) and introduced an additional requirement for both a capital conservation buffer and a countercyclical buffer to be met with CET1 capital.

As a Spanish credit institution, we are subject to the CRD IV Directive, through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. The core regulation regarding the solvency of credit entities is the CRR, which is complemented by several binding regulatory technical standards, all of which are directly applicable in all EU Member States, without the need for national implementation measures. The implementation of CRD IV Directive into Spanish law has taken place through RD-L 14/2013, Law 10/2014, RD 84/2015, Bank of Spain Circular 2/2014 and Bank of Spain Circular 2/2016. On November 23, 2016, the European Commission published a package of proposals, the EU Banking Reforms, including measures to increase the resilience of EU institutions and enhance financial stability.

Among other things, CRD IV established minimum “Pillar 1” capital requirements both on a consolidated and individual basis (which includes a CET1 capital ratio of 4.5%, a Tier 1 capital ratio of 6% and a total capital ratio of 8% of risk-weighted assets). Additionally, CRD IV increased the level of capital required by means of a “combined buffer requirement” that entities must comply with from 2016 onwards. The “combined buffer requirement” has introduced five new capital buffers: (i) the capital conservation buffer, (ii) the G-SIB buffer, (iii) the institution-specific countercyclical buffer, (iv) the D-SIB buffer and (v) the systemic risk buffer. The “combined buffer requirement” applies in addition to the minimum “Pillar 1” capital requirements and is required to be satisfied with CET1 capital.

The combination of the capital conservation buffer, the institution-specific countercyclical buffer and the higher of (depending on the institution) the systemic risk buffer, the G-SIB buffer and the D-SIB buffer, in each case (if applicable to the relevant institution—in the event that the systemic risk buffer only applies to local exposures, such buffer is added to the higher of the G-SIB buffer or the D-SIB buffer) is referred to as the “combined buffer requirement”. This “combined buffer requirement” is in addition to the “Pillar 1” and the “Pillar 2” capital requirements and is required to be satisfied with CET1 capital.

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The G-SIB buffer applies to those institutions included on the list of G-SIBs, which is updated annually by the FSB. We have been excluded from this list with effect from January 1, 2017 and so, unless otherwise indicated by the FSB (or the Bank of Spain) in the future, we will not be required to maintain a G-SIB buffer any longer.

The Bank of Spain announced on November 7, 2016 that we will continue to be considered a D-SIB, and consequently we will be required to maintain during 2017 a D-SIB buffer of a CET1 capital ratio of 0.75% on a consolidated basis. The D-SIB buffer is being phased-in from January 1, 2016 to January 1, 2019, and the D-SIB buffer applicable to BBVA for 2017 is a CET1 capital ratio of 0.375% on a consolidated basis.

Moreover, Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of the SSM Framework Regulation, also contemplate that in addition to the minimum “Pillar 1” capital requirements and the combined buffer requirements, supervisory authorities may impose (above “Pillar 1” requirements and below the combined buffer requirements) further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum “own funds” “Pillar 1” requirements under CRD IV or to address macro-prudential considerations.

Accordingly, any additional “Pillar 2” own funds requirement that may be imposed on us and/or the Group by the ECB pursuant to the SREP will require us and/or the Group to hold capital levels in addition to the ones required by the “Pillar 1” capital requirements and the combined buffer requirements.

As a result of the most recent SREP carried out by the ECB in 2016, we have been informed by the ECB that, effective from January 1, 2017, we are required to maintain (i) a CET1 phased-in capital ratio of 7.625% (on a consolidated basis) and 7.25% (on an individual basis); and (ii) a phased-in total capital ratio of 11.125% (on a consolidated basis) and 10.75% (on an individual basis).

This phased-in total capital ratio of 11.125% on a consolidated basis includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%); (ii) the “Pillar 1” Additional Tier 1 capital requirement (1.5%); (iii) the “Pillar 1” Tier 2 capital requirement (2%); (iv) the additional CET1 capital requirement under “Pillar 2” (1.5%); (v) the capital conservation buffer (1.25% CET1); and (vi) the D-SIB buffer (0.375% CET1).

According to Article 48 of Law 10/2014, Article 73 of RD 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, any entity not meeting its “combined buffer requirement” is required to determine its MDA as described therein. Until the MDA has been calculated and communicated to the Bank of Spain, where applicable, the relevant entity will be subject to restrictions on (i) distributions relating to CET1 capital, (ii) payments in respect of variable remuneration or discretionary pension revenues and (iii) distributions relating to Additional Tier 1 Instruments (“discretionary payments”) and, thereafter, any such discretionary payments by that entity will be subject to such MDA limit. Furthermore, as set forth in Article 48 of Law 10/2014, the adoption by the Bank of Spain of the measures prescribed in Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds or limiting or prohibiting the distribution of dividends respectively will also restrict the discretionary payments to such MDA. See “Item 3 Key Information —Risk Factors—Legal, Regulatory and Compliance Risks–Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations” for additional information.

Capital Management

Basel Capital Accord - Economic Capital

The Group’s capital management is performed at both the regulatory and economic levels.

Regulatory capital management is based on the analysis of the capital base and the capital ratios (core capital, Tier 1, etc.) using Basel (“BIS”) and the CRR. See Note 32 to the Consolidated Financial Statements.

The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitizations, sales of assets, and preferred and subordinated issues of equity and hybrid instruments. In recent years we have taken various actions in connection with our capital management and in order to comply with various capital requirements applicable to us. We may make securities issuances or undertake asset sales in the future, which could

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involve outright sales of businesses or reductions in interests held by us, which could be material and could be undertaken at less than their respective book values, resulting in material losses thereon, in connection with our capital management and in order to comply with capital requirements or otherwise.

The Bank has obtained the Bank of Spain’s approval with respect to its internal model of capital estimation (“IRB”) concerning certain portfolios and its operational risk internal model.

From an economic standpoint, capital management seeks to optimize value creation at the Group and at its different business units.

The Group allocates economic capital (“CER”) commensurate with the risks incurred by each business. This is based on the concept of unexpected loss at a certain level of statistical confidence, depending on the Group’s targets in terms of capital adequacy. The CER calculation combines lending risk, market risk (including structural risk associated with the balance sheet and equity positions), operational risk and fixed asset and technical risks in the case of insurance companies.

Stockholders’ equity, as calculated under BIS rules, is an important metric for the Group. However, for the purpose of allocating capital to operating segments the Group prefers CER. It is risk-sensitive and thus better reflects management policies for the individual businesses and the business portfolio. These provide an equitable basis for assigning capital to businesses according to the risks incurred and make it easier to compare returns.

To internal effects of management and pursuit of the operating segments, the Group realizes a capital allocation to each operating segment.

Concentration of Risk

The Bank of Spain regulates the concentration of risk. Since January 1, 1999, any exposure to a person or group exceeding 10% of a group’s or bank’s regulatory capital has been deemed a concentration. The total amount of exposure represented by all of such concentrations may not exceed 800% of regulatory capital. Exposure to a single person or group may not exceed 25% (20% in the case of non-consolidated companies of the economic group) of a bank’s or group’s regulatory capital.

Legal and Other Restricted Reserves

We are subject to the legal and other restricted reserves requirements applicable to Spanish companies. Please see “—Capital Requirements”.

Impairment on Financial Assets

For a discussion of provisions for loan losses and country risk, see Note 2.2.1 to the Consolidated Financial Statements.

Regulation of the Disclosure of Fees and Interest Rates

Banks must publish their preferential rates, rates applied on overdrafts, and fees and commissions charged in connection with banking transactions. Banking clients must be provided with written disclosure adequate to permit customers to ascertain transaction costs. The foregoing regulations are enforced by the Bank of Spain in response to bank client complaints.

Law 44/2002, of November 22, concerning measures to reform the Spanish financial system, contained a rule concerning the calculation of variable interest applicable to loans and credit secured by mortgages, bails, pledges or any other equivalent guarantee.

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Employee Pension Plans

Under the relevant collective labor agreements, BBVA and some of its subsidiaries provide supplemental pension payments to certain active and retired employees and their beneficiaries. These payments supplement social security benefits from the Spanish state. See Note 2.2.12 and Note 25 to the Consolidated Financial Statements.

Dividends

A bank may generally dedicate all of its net profits and its distributable reserves to the payment of dividends. In no event may dividends be paid from non-distributable reserves. For additional information see “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends”.

Although banks are not legally required to seek prior approval from the Bank of Spain or the ECB before declaring interim dividends, we inform them on a voluntary basis upon the declaration of an interim dividend. It should be noted that the ECB recommendation dated December 13, 2016 addressed to, among others, significant supervised entities and significant supervised groups, such as BBVA and its Group, recommends credit institutions to establish dividend policies using conservative and prudent assumptions so that, after any such distribution, they are able to satisfy the applicable capital requirements and any other requirements resulting from the supervisory review and evaluation process (SREP).

Since January 1, 2016, according to CRD IV, those credit entities required to calculate their MDA will be subject to restrictions on discretionary payments, which includes, among others, dividend payments. See “—Capital Requirements”.

Our Bylaws allow for dividends to be paid in cash or in kind as determined by shareholders’ resolution.

Scrip Dividend

As in 2011, 2012, 2013, 2014 and 2015, during 2016 a scrip dividend scheme called “Dividend Option” was approved by the annual general meeting of shareholders held on March 11, 2016. The BBVA annual general meeting of shareholders held on March 17, 2017 passed one resolution adopting a capital increase to be charged to voluntary reserves for the implementation of a “Dividend Option” in 2017. This resolution allows BBVA to implement, depending on the results of BBVA, the market conditions, the regulatory framework and the recommendations regarding dividends that may be adopted, one “Dividend Option” during 2017.

Upon the execution of such capital increase to be charged to voluntary reserves, BBVA shareholders will have the option, at their own free choice, to receive all or part of their remuneration in newly issued ordinary shares of BBVA or in cash. For additional information on the “Dividend Option” scheme, including its tax implications, see “Item 10. Additional Information—Taxation—Spanish Tax Considerations—Taxation of Dividends—Scrip Dividend” and “Item 10. Additional Information—Taxation—U.S. Tax Considerations—Taxation of Distributions”.

The “Dividend Option” is implemented as an alternative remuneration scheme for BBVA shareholders with the aim to provide BBVA shareholders with a flexible option to receive all or part of their remuneration in newly issued ordinary shares of the Bank, whilst always maintaining the possibility to choose to receive the entire remuneration in cash.

BBVA’s Board of Directors, at its March 17, 2017 meeting, approved the execution of the capital increase approved by the BBVA annual general meeting of shareholders held on March 17, 2017 in connection with the implementation of a “Dividend Option” on the terms provided therein. The maximum number of new ordinary shares that may be issued as a consequence of the execution of the capital increase is 121,603,985 which is expected to become effective on April 26, 2017.

Limitations on Types of Business

Spanish banks are subject to certain limitations on the types of businesses in which they may engage directly, but they are subject to few limitations on the types of businesses in which they may engage indirectly.

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Mortgage Legislation

Law 2/1981, of March 25, on mortgage market, as amended by Law 41/2007, regulates the different aspects of the Spanish mortgage market and establishes additional rules for the mortgage and financial system.

Royal Decree 716/2009, of April 24, implemented several aspects of Law 2/1981, of March 25. The most significant aspect implemented by Royal Decree 716/2009 was the modification on the loan-to-value ratio requirement intending to improve the quality of Spanish mortgage-backed securities.

Increasing social pressure for the reform of mortgage legislation in Spain has resulted in changes to such legislation, which are described below.

Royal Decree 6/2012, of March 9, on urgent measures to protect mortgage debtors without financial resources introduced measures to enable the restructuring of mortgage debt and easing of collateral foreclosure aimed to protect especially vulnerable debtors.

Such measures include the following:

• the moderation of interest rates charged on mortgage arrears;

• the improvement of extrajudicial procedures as an alternative to legal foreclosure;

• the introduction of a voluntary code of conduct among lenders for regulated mortgage debt restructuring affecting especially vulnerable debtors; and

• where restructuring is unviable, lenders may, where appropriate and on an optional basis, offer the debtor partial debt forgiveness.

In addition, Royal Decree 27/2012, of November 15, on urgent measures to enhance the protection of mortgage debtors provided for a two-year moratorium, from the date of its adoption, on evictions applicable to debtor groups especially susceptible to social exclusion, which may remain at their homes for such period.

Law 1/2013, of May 14, on measures to protect mortgagees, debt restructuring and social rents, introduced important modifications to mortgage law and civil procedure law. The most relevant modifications are:

• extension of the two-year moratorium, established by Royal Decree 27/2012, until May 15, 2015;

• broadening the potential beneficiaries of the moratorium of Royal Decree 6/2012;

• limitation of the interest rates applied for delay or arrears;

• in the context of an auction, the base value of the property shall be the value set forth in the relevant mortgage deed and in no case shall it be less than 75% of the official appraisal value of the property;

• the possibility of suspension of enforcement proceedings when the loan or credit facility secured by the mortgage contains abusive clauses; and

• modification of the out-of-court notarial procedure.

Royal Decree 11/2014, following the judgment of the EU Court of Justice of July 17, 2014 regarding Spanish foreclosure processes, allows debtors to appeal against a court’s resolution which rejects his or her opposition to the execution of a mortgage.

The Mortgage Credit Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property was adopted on February 4, 2014. This Directive aims to create a Union-wide mortgage credit market with a high level of consumer protection. It applies to both secured credit and home loans. Member States will have to transpose its provisions into their national law by March 2016.

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The most recent development regarding mortgage legislation in Spain is the approval by the Spanish government of Royal Decree-Law 1/2015 of February 27 on the “second chance” mechanism. The Royal Decree, although already in force, needs to be passed as law by Parliament, which is expected to take place through the emergency procedure in the next few days. During this process, amendments may be made to the current text. The main purpose of the Royal Decree is to regulate the “second chance” mechanism. This allows an individual who has been declared bankrupt to be discharged of outstanding obligations as long as he or she fulfills certain requirements: (i) the bankruptcy proceedings must have concluded, (ii) the debtor must have acted in good faith, the Royal Decree being restrictive as to when a debtor is considered to have acted in good faith, and (iii) the bankruptcy judge has to approve the terms of the discharge (and may revoke his or her approval under certain circumstances upon request of any creditor in the following five years). Discharge from mortgage obligations would only apply to the outstanding debts after the foreclosure, as long as such debts are considered ordinary or subordinate according to the Spanish Insolvency Law. Co-debtors and guarantors, if any, would remain liable.

Law 25/2015, of July 28, on the “second chance” mechanism, superseded Royal Decree Law 1/2015 and introduced certain changes to its content, including the introduction of a fee protection account for insolvency managers, limits on the remuneration of insolvency managers and the introduction of greater flexibility to a number of elements of the “second chance” mechanism.

Mutual Fund Regulation

Law 22/2014 of November 12, introduced a new legal regime for private investment entities in order to incorporate (i) Directive 2011/61/EU of the European Parliament and of the Council of June 8 on Alternative Investment Fund Managers, and (ii) Directive 2013/14/EU of the European Parliament and of the Council of May 21.

Spanish Corporate Enterprises Act

The consolidated text of the Corporate Enterprises Act adopted under Legislative Royal Decree 1/2010, of July 2, repealed the former Companies Act, adopted under Legislative Royal Decree 1564/1989, of December 22. This royal legislative decree has consolidated the legislation for joint stock companies (sociedades anónimas) and limited liability companies (sociedades de responsabilidad limitada) in a single text, bringing together the contents of the two aforementioned acts, as well as a part of the Securities Exchange Act.

Law 25/2011 of August 1, partially amended the Corporate Enterprises Act and incorporated Directive 2007/36/EC, of July 11, on the exercise of certain rights of shareholders in listed companies.

In addition, the Entrepreneur Act (Law 14/2013) and an amendment to the Insolvency Act (Legislative Royal Decree 11/2014) introduced some modifications on the Spanish Corporate Enterprises Act. Also, an amendment on corporate governance was introduced by Law 31/2014 of December 3. The main changes introduced by this law are related to the rights of shareholders (assistance, information and voting), the calling of a general shareholders’ meeting and the duties of the board of directors and the audit committee, appointments committee and remuneration committee.

Spanish Auditing Law

Law 12/2010, of June 30, amended Law 19/1988, of July 12, on Accounts Audit, Law 24/1988, of July 28, on Securities Exchanges and the consolidated text of the former Companies Act adopted by Legislative Royal Decree 1564/1989, of December 22 (currently, the Corporate Enterprises Act), for its adaptation to EU regulations. This law transposed Directive EU/2006/43 which regulates aspects, among others, related to: authorization and registry of auditors and auditing companies, confidentiality and professional secrecy which the auditors may observe, rules on independency and liability as well as certain rules on the composition and functions of the auditing committee. The Royal Decree 1/2011, of July 1, approved the consolidated text of the Accounts Audit Law 12/2010 and repealed Law 19/1988, of July 12. Law 12/2010 was subsequently amended by Law 22/2015, including, among other matters, with respect to the requirements applicable to audit firms.

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Law 11/2015 of June 18, on the recovery and resolution of credit institutions and investment firms

Law 11/2015 transposes a very important part of EU Law into Spanish law in respect of the recovery and resolution mechanisms for credit institutions and investment firms (the “institutions”). It further assumes many of the provisions of Law 9/2012 of November 14, 2012 on the restructuring and resolution of credit institutions, which it partially repeals.

The regime set in place constitutes a special and full administrative procedure that seeks to ensure maximum speed in the intervention of an institution so as to provide for the continuity of its core functions, while minimizing the impact of its non-viability on the economic system and on public resources.

Compared to Law 9/2012, Law 11/2015 regulates internal recapitalization as a resolution instrument conceived as a “bail-in” arrangement (the absorption of losses by the shareholders and by the creditors of an institution under resolution).

The internal recapitalization is a new resolution instrument, since the loss-absorption mechanism makes it extensive to all the institution’s creditors, and not only to the shareholders and the subordinated creditors as envisaged under Law 9/2012 of November 14, 2012.

In this respect, liabilities eligible for the bail-in are all the institution’s liabilities that are not expressly excluded or have not been excluded further to a decision by the FROB. These liabilities shall be susceptible to amortization or conversion into capital for the internal recapitalization of the institution concerned. Among the liabilities excluded are deposits guaranteed by the Deposit Guarantee Fund (up to €100,000) and liabilities incurred with employees, trade creditors and the tax or social security authorities.

Certain changes were made to the regime applicable in the event of the insolvency of an institution, in order to provide greater protection to the deposits of individuals and SMEs. In this respect, the following shall be considered as privileged credits: (i) deposits guaranteed by the Deposit Guarantee Fund (maximum of €100,000) and the rights to which they may have been subrogated should the guarantee have been made effective and (ii) the portion of the deposits of individuals and SMEs that exceeds the guaranteed level, and those deposits of those individuals and SMEs that would be guaranteed had they not been set up in branches located outside the EU.

For additional information on Law 11/2015, see “Item 3. Key Information—Risk Factors—Bail-in and write-down powers under the BRRD may adversely affect our business and the value of any securities we may issue”.

Royal Decree 1012/2015 of November 6, on development of Law on recovery and resolution of credit entities and investment firms and modification of Royal Decree on deposit guarantee funds of credit entities

Royal Decree 1012/2015 partially transposes the BRRD and develops Law 11/2015 (described above).

Royal Decree 1012/2015 includes a package of measures aimed at: (i) establishing the criteria for the application of the regulation for the resolution of credit entities, (ii) establishing the content of the recovery and resolution plans for credit entities, (iii) regulating the use of the resolution instruments set in Law 11/2015, and in particular, the actions to be carried out by the FROB, (iv) establishing the regime applicable to the FROB in connection with the managing of the funds addressed to finance the resolution procedures and to the contributions that credit entities must make to the National Resolution Fund and, (v) establishing the regime applicable to the resolution of cross border entities.

Law 5/2015 of April 27, on promoting corporate financing

Among other matters, Law 5/2015 establishes a number of changes to encourage bank financing to SMEs, sets out the new legal framework for financial credit entities and regulates crowd funding. Law 5/2015 has also introduced amendments on other matters, including securitizations and debt issuance. It consolidates into one piece of legislation what has, until now, been a dispersed legal framework on securitization.

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Law 5/2015 imposes an obligation on credit institutions to provide SMEs at least three months prior notice in the event the funding flow to an SME is to be cancelled or reduced by at least 35%. In so doing, the law aims to provide SMEs sufficient time to find new funding sources or to adjust the management of their own funds to avoid sudden liquidity deficiencies.

The main novelties of this new regime are the following: (i) private limited liability companies (sociedades limitadas or S.L.s) can issue and guarantee standard debt securities issuances capped at twice their own funds, (ii) the quantitative limit on debt issuances by non-listed public limited liability companies (sociedades anónimas or S.A.s) is removed. (iii) the management body of an issuer is authorized to approve standard debt securities issuances which do not yield part of the profits, unless stated otherwise in the issuer’s articles of association and (iv) it is clarified that it is unnecessary to appoint a commissioner and set up a syndicate of bondholders in debt issuances governed by foreign law and aimed at international markets.

U.S. Regulation

The legislative, regulatory and supervisory framework in the United States governing the financial services sector has undergone significant and rapid change since the financial crisis. Moreover, the intensity of supervisory and regulatory scrutiny has also increased. While most of the changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) that impact BBVA and its subsidiaries have been implemented or are expected to follow a known trajectory, new changes under the Trump administration, including their nature and impact, cannot yet be determined with any degree of certainty.

The Dodd-Frank Act addresses, among other issues, systemic risk oversight, bank capital standards, the resolution of failing systemically significant U.S. financial institutions, over-the-counter derivatives, restrictions on the ability of banking entities to engage in proprietary trading activities and invest in certain private equity funds, hedge funds and other covered funds (known as the “Volcker Rule”), consumer and investor protection, hedge fund registration, municipal advisor registration and regulation, securitization, investment advisor registration and regulation and the role of credit-rating agencies.

While U.S. regulators have implemented many provisions of the Dodd-Frank Act through detailed rulemaking, full implementation will require additional rulemaking and uncertainty remains about the final details, impact and timing of a number of rules.

Financial Regulatory Authorities

BBVA is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As such, BBVA is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). BBVA’s direct and indirect activities and investments in the United States are limited to banking activities and certain non-banking activities that are “closely related to banking,” as determined by the Federal Reserve, and certain other activities permitted under the BHC Act. BBVA also is required to obtain the prior approval of the Federal Reserve before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting securities of any U.S. bank or bank holding company.

A bank holding company is required to act as a source of financial strength for its U.S. bank subsidiaries. Among other things, this source of strength obligation may result in a requirement for BBVA, as controlling shareholder, to inject capital into its U.S. bank subsidiary.

BBVA’s U.S. bank subsidiary, Compass Bank (“Compass Bank”), and BBVA’s New York branch are subject to supervision and regulation by a variety of U.S. regulatory agencies. In addition to supervision by the Federal Reserve, BBVA’s New York branch is licensed and supervised by the New York State Department of Financial Services. Compass Bank is an Alabama state-chartered bank, is a member of the Federal Reserve System, and has branches in Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. Compass Bank is supervised and examined by the Federal Reserve, the State of Alabama Banking Department and, with respect to consumer financial laws and regulations, the Consumer Financial Protection Bureau. In addition, certain aspects of Compass Bank’s branch operations in Arizona, California, Colorado, Florida, New Mexico, and Texas are subject to examination by the respective state banking regulators in such states. Compass Bank is also a depository institution insured by, and subject to the regulation of, the Federal Deposit Insurance Corporation (the “FDIC”).

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Compass Bank is a direct subsidiary of BBVA Compass Bancshares, Inc. (“Compass Bancshares”). Compass Bancshares is a bank holding company within the meaning of the BHC Act and is subject to supervision and regulation by the Federal Reserve.

BBVA Bancomer, S.A.’s agency office in Houston, Texas is a non-FDIC insured agency office of BBVA Bancomer, S.A., an indirect subsidiary of BBVA, which is licensed under the laws of the State of Texas and supervised by the Texas Department of Banking and the Federal Reserve.

Bancomer Transfer Services, Inc., a non-banking affiliate of BBVA and a direct subsidiary of BBVA Bancomer USA, Inc., is licensed as a money transmitter by the State of California Department of Financial Institutions, the Texas Department of Banking, and certain other state regulatory agencies. Bancomer Transfer Services, Inc. is also registered as a money services business with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury.

BBVA’s indirect U.S. broker-dealer subsidiary, BBVA Securities Inc. (“BSI”), is subject to regulation and supervision by the SEC and the Financial Industry Regulatory Authority (“FINRA”) with respect to its securities activities, as well as various U.S. state regulatory authorities. Additionally, the securities underwriting and dealing activities of BSI are subject to regulation and supervision by the Federal Reserve. On December 19, 2016, BBVA and BSI entered into a consent order with the Federal Reserve under which they agreed to pay a $27 million civil money penalty for BSI engaging in activities contrary to its commitments under the authorizing order and BBVA directly engaging in impermissible underwriting and dealing activities.

The activities of BBVA’s U.S. investment adviser affiliates are regulated and supervised by the SEC. In addition, Compass Bank has registered with the SEC and the Municipal Securities Rulemaking Board as a municipal advisor pursuant to the Dodd-Frank Act’s municipal advisor registration requirements.

BBVA’s U.S. insurance agency affiliate is subject to regulation and supervision by various U.S. state insurance regulatory authorities.

BBVA is registered as a “swap dealer” (as defined in the Commodity Exchange Act and the regulations promulgated thereunder) under Title VII of the Dodd-Frank Act, which subjects BBVA to regulation and supervision by the U.S. Commodity Futures Trading Commission (the “CFTC”). BBVA’s world-wide swap activities are also subject to regulations adopted by the European Commission pursuant to the European Market Infrastructure Regulation (“EMIR”) and the EU’s Markets in Financial Instruments Directive (“MiFID”) and other European regulations and directives. The CFTC will deem BBVA to have complied with certain Dodd-Frank Act Title VII provisions for which, subject to certain conditions, the CFTC has found certain corresponding European provisions to be essentially identical or comparable, provided BBVA complies with such European provisions, as applicable. Compass Bank (and other entities of the BBVA Group) may register as a swap dealer if required by its swap activities or if it is determined to be beneficial to its business.

Currently, BBVA is not considering registration as a “security-based swap dealer” with the SEC.

Prudential Regulation

In the past few years, the Federal Reserve has imposed greater risk-based and leverage capital requirements, liquidity requirements, capital planning and stress testing requirements, risk management requirements and other enhanced prudential standards for bank holding companies with $50 billion or more in total consolidated assets, including Compass Bancshares. Under the enhanced prudential standard regulations applicable to foreign banking organizations with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies, by July 1, 2016, BBVA designated Compass Bancshares as its separately capitalized top-tier U.S. intermediate holding company (“IHC”). Compass Bancshares holds all of BBVA’s U.S. bank and nonbank subsidiaries, including Compass Bank. As BBVA’s U.S. IHC, Compass Bancshares is subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. BBVA’s U.S. branches and agencies (and in certain cases, the entire U.S. operations of BBVA) are also subject to liquidity buffer and risk management requirements. In addition, BBVA is subject to requirements related to the adequacy and reporting of its home country capital and stress testing standards.

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Under Title I of the Dodd-Frank Act and implementing regulations issued by the Federal Reserve and the FDIC, BBVA must prepare and submit annually a plan for the orderly resolution of subsidiaries and operations in the event of future material financial distress or failure (the “Title I Resolution Plan”). For foreign-based companies subject to these resolution planning requirements, such as BBVA, the Title I Resolution Plan relates to subsidiaries, branches, agencies and businesses that are domiciled in, or whose activities are carried out in whole or in material part in, the United States. BBVA filed its last Title I Resolution Plan in December 2015 and was not required to file a plan in 2016. In addition, Compass Bank is subject to the FDIC rule requiring insured depository institutions with total assets of $50 billion or more to submit periodically to the FDIC a plan for resolution in the event of failure under the Federal Deposit Insurance Act.

As part of the implementation of enhanced prudential standards under the Dodd-Frank Act, in March 2016, the Federal Reserve reproposed a rule implementing single-counterparty credit limits for large U.S. bank holding companies and large FBOs with respect to their combined U.S. operations. The proposed rule would apply both to Compass Bancshares and to the combined U.S. operations of BBVA with different levels of stringency. Compass Bancshares’ credit exposure to any single counterparty would be limited to 25 percent of its capital stock and surplus. BBVA’s credit exposure with respect to only its combined U.S. operations would be limited to 15 percent of Tier 1 capital for counterparties that are G-SIBs and certain other large financial institutions and to 25 percent of Tier 1 capital for all other unaffiliated counterparties. The proposed rule would also require Compass Bancshares and BBVA to aggregate credit exposure across counterparties that are economically interdependent or that are connected by certain control relationships.

The Federal Reserve has proposed but not yet finalized an early remediation framework for large U.S. bank holding companies and large FBOs.

Capital and Liquidity

Compass Bancshares and Compass Bank are subject to the U.S. Basel III capital rules (“U.S. Basel III”), which are based on the Basel III regulatory capital standards established by the Basel Committee. Certain aspects of U.S. Basel III, such as the minimum capital ratios and the methodology for calculating risk-weighted assets, became effective on January 1, 2015 for Compass Bancshares and Compass Bank. Other aspects of the rules, such as the capital conservation buffer and certain deductions from and adjustments to regulatory capital, are being phased in over several years.

The minimum regulatory capital ratios under U.S. Basel III are the following: Common Equity Tier 1 risk-based capital ratio of 4.5%; Tier 1 risk-based capital ratio of 6.0%; Total risk-based capital ratio of 8.0%; and Tier 1 leverage ratio of 4.0%. The greater than 2.5% Common Equity Tier 1 capital conservation buffer will be fully phased in by 2019; the phase-in amount for 2017 is greater than 1.25%. Failure to maintain the capital conservation buffer will result in increasingly stringent restrictions on a banking organization’s ability to make dividend payments and other capital distributions and pay discretionary bonuses to executive officers.

U.S. Basel III also revised the capital thresholds for the prompt corrective action framework for insured depository institutions. To qualify as “well capitalized,” Compass Bank must maintain a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%, a Total risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 5.0%.

The federal banking regulators have issued liquidity coverage ratio (“LCR”) requirements, which are based on the Basel Committee’s LCR standard and are designed to ensure that covered banking organizations have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. As a U.S. bank holding company with total assets of $50 billion or more that is not an advanced approaches bank holding company, Compass Bancshares is subject to a modified version of the LCR. As of January 1, 2017, Compass Bancshares is required to maintain a minimum of 100% of the fully phased-in modified LCR. In addition, effective October 1, 2018, Compass Bancshares will be required to disclose certain quantitative and qualitative information related to its LCR calculation after each calendar quarter.

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On June 1, 2016, the Federal Reserve Board and other U.S. regulators proposed rules to implement net stable funding ratio (“NSFR”), which are based on additional quantitative liquidity standards developed by the Basel Committee and are designed to ensure that an institution maintains sufficiently stable amounts of longer-term funding over a one-year horizon. The proposal includes a modified, less stringent version of the NSFR that would apply to institutions with total assets of $50 billion or more that are not advanced approaches bank holding companies, such as Compass Bancshares.

Under the Federal Reserve’s capital plan and stress test rules, Compass Bancshares must submit an annual capital plan to the Federal Reserve for review, must conduct semi-annual stress tests and is subject to an annual supervisory stress test conducted by the Federal Reserve (“Dodd-Frank Act Stress Test”). The capital planning and stress test requirements are part of the Federal Reserve’s CCAR program, pursuant to which it reviews the qualitative and quantitative aspects of large U.S. bank holding companies’ internal capital planning process. Compass Bancshares’ annual capital plan must include an assessment of the expected uses and sources of capital over a forward-looking planning horizon of at least nine quarters, a detailed description of its process for assessing capital adequacy, its capital policy, and a discussion of any expected changes to its business plan that are likely to have a material impact on its capital adequacy or liquidity. The Federal Reserve may object, in whole or in part, to a capital plan or provide a notice of non-objection. If the Federal Reserve objects to a capital plan, the bank holding company may not make any capital distribution other than those with respect to which the Federal Reserve has indicated its non-objection. In January 2017, the Federal Reserve issued a final rule exempting large and noncomplex firms, including Compass Bancshares, from the qualitative component of CCAR. The Dodd-Frank Act and implementing rules issued by the Federal Reserve also impose stress test requirements on Compass Bank.

For the capital plan and stress test cycle beginning January 1, 2016, Compass Bancshares submitted its capital plan and company-run stress test results to the Federal Reserve by April 5, 2016. In June 2016, the Federal Reserve published summary results of the Dodd-Frank Act Stress Test, which showed that Compass Bancshares’ projected regulatory capital ratios exceeded the applicable regulatory minimums as defined by the Federal Reserve for all quarters included in the nine-quarter forecasting horizon under the hypothetical supervisory severely adverse scenario. In addition, the Federal Reserve did not object to the 2016 capital plan of Compass Bancshares. For the capital plan and stress test cycle beginning January 1, 2017, Compass Bancshares must submit its capital plan and company-run stress test results to the Federal Reserve by April 5, 2017, and the Federal Reserve is required to publish summary stress test results by June 30, 2017.

Volcker Rule

The Volcker Rule limits the ability of banking entities to sponsor or invest in certain hedge funds, private equity funds, and commodity pools (“covered funds”) and to engage as principal in certain types of proprietary trading unrelated to serving clients, subject to certain exclusions and exemptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with covered funds with which they or their affiliates have certain relationships. The Volcker Rule regulations contain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained. The Federal Reserve has extended the Volcker Rule’s general conformance period for investments in and relationships with covered funds and certain foreign funds that were in place on or prior to December 31, 2013 until July 21, 2017. This extension of the conformance period does not apply to the Volcker Rule’s prohibitions on proprietary trading or to any investments in and relationships with covered funds made or entered into after December 31, 2013.

Derivatives

The Dodd-Frank Act established an extensive framework for the regulation of over-the-counter (“OTC”) derivatives by the CFTC and the SEC, including mandatory clearing, exchange trading and public and regulatory transaction reporting of certain OTC derivatives, as well as rules regarding the registration of swap dealers and major swap participants, and related capital, margin, business conduct, record keeping and other requirements applicable to such entities. While the CFTC has completed the majority of its regulations in this area, most of which are in effect, the SEC has not yet adopted a number of its swaps regulations. In December 2016, the CFTC reproposed regulations to impose position limits on certain physical commodities futures contracts and economically equivalent swaps, futures and options. In addition, the federal banking regulators and the CFTC adopted final rules establishing margin requirements for non-cleared swaps and security-based swaps. The final margin rules follow a

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phased implementation schedule, with certain initial margin and variation margin requirements in effect as of September 2016, additional variation margin requirements coming into effect in March 2017, and additional initial margin requirements phased in on an annual basis from September 2017 through September 2020, depending on the transactional volume of the parties and their affiliates.

Because BBVA is a non-U.S. swap dealer, the CFTC generally limits its direct regulation of BBVA with respect to swaps with U.S. persons and certain affiliates of U.S. persons. However, the CFTC will be applying certain transaction-level requirements when BBVA’s swap dealing activity involves the arrangement, negotiation, or execution by U.S. located personnel and is considering whether to apply regulatory transaction reporting to all swaps entered into by a non-U.S. swap dealer or instead rely on transaction reporting under comparable EU rules. In August 2016, the CFTC staff extended no-action relief for the applicability of most transaction-level requirements until at least September 30, 2017.

The so-called swaps “push-out” provision, Section 716 of the Dodd-Frank Act, prohibits U.S. federal assistance to be provided to any swaps entity, including any swap dealer, with respect to certain types of swaps, subject to certain exceptions. The swap activities of BBVA’s New York branch have always conformed to the requirements of Section 716. Should Compass Bank become a swap dealer, it will need to restrict its swap activities to conform to the “push-out” provision.

Other Regulations

The Dodd-Frank Act changed the FDIC deposit insurance assessment framework (the amounts paid by FDIC-insured institutions into the deposit insurance fund of the FDIC) to shift a greater portion of the aggregate assessments to large banks (such as Compass Bank). In March 2016, the FDIC finalized a rule imposing assessment surcharges on banks with $10 billion or more in total assets (such as Compass Bank) to increase the deposit insurance fund’s reserve ratio. These surcharges will cease on December 31, 2018.

The Dodd-Frank Act broadened the application of Sections 23A and 23B of Federal Reserve Act, although the Federal Reserve has not yet implemented such changes in Regulation W (“Reg W”). Reg W places various qualitative and quantitative restrictions on BBVA and its non-bank subsidiaries with regard to borrowing or otherwise obtaining credit from their U.S. banking affiliates or engaging in certain other transactions involving those subsidiaries. Such transactions must be on terms that would ordinarily be offered to unaffiliated entities, must be secured by designated amounts of specified collateral, are subject to quantitative limitations. Under the Dodd-Frank changes, credit exposure arising from derivative transactions, securities borrowing and lending transactions, and repurchase/reverse repurchase agreements are subject to the collateral and quantitative limitations. The Reg W restrictions also apply to certain transactions of BBVA’s New York Branch with certain of its affiliates.

The regulations that the CFPB may adopt could affect the nature of the consumer activities that Compass Bancshares, Compass Bank and BBVA’s New York branch may conduct, and may impose restrictions and limitations on the conduct of such activities. The CFPB has promulgated many mortgage-related rules since it was established under the Dodd-Frank Act, including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements and appraisal and escrow standards for higher-priced mortgages. These rules have created operational and strategic challenges for Compass Bancshares, as it is both a mortgage originator and a servicer.

Under the Durbin Amendment to the Dodd-Frank Act, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction, a 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction.

The Dodd-Frank Act requires the SEC to cause issuers with listed securities, which may include foreign private issuers such as BBVA, to establish a “claw back” policy to recoup previously awarded employee compensation in the event of an accounting restatement. The SEC proposed rules in 2015 to implement this provision. In addition, the Dodd-Frank Act requires U.S. regulatory agencies to prescribe regulations with respect to incentive-based compensation at financial institutions in order to prevent inappropriate behavior that could lead to a material financial loss. In 2016, federal regulators reproposed a rule that would require, among other things, the deferral of a percentage of certain incentive-based compensation for senior executives and certain other employees and, under certain circumstances, clawback of incentive-based compensation.

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The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions in the Securities Act, the Exchange Act and the Investment Advisers Act of 1940.

A major focus of U.S. governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to BBVA and certain of its affiliates impose obligations to maintain appropriate policies, procedures, and controls to detect, prevent, and report money laundering. In particular, Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), as amended, requires financial institutions operating in the United States to (i) give special attention to correspondent and payable-through bank accounts, (ii) implement enhanced reporting due diligence, and “know your customer” standards for private banking and correspondent banking relationships, (iii) scrutinize the beneficial ownership and activity of certain non-U.S. and private banking customers (especially for so-called politically exposed persons), and (iv) develop new anti-money laundering programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement compliance programs under the Bank Secrecy Act and the sanctions programs administered by the Office of Foreign Assets Control. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the institution.

Disclosure of Iranian Activities under Section 13(r) of the Exchange Act

The BBVA Group discloses the following information pursuant to Section 13(r) of the Exchange Act, which requires an issuer to disclose whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under specified executive orders, including activities not prohibited by U.S. law and conducted outside the United States by non-U.S. affiliates in compliance with local law. In order to comply with this requirement, the Company has requested relevant information from its affiliates globally.

The BBVA Group has the following activities, transactions and dealings with Iran requiring disclosure.

Legacy contractual obligations related to counter indemnities. Before 2007, the BBVA Group issued certain counter indemnities to its non-Iranian customers in Europe for various business activities relating to Iran in support of guarantees provided by Bank Melli, two of which remained outstanding during the year ended December 31, 2016. For the year ended December 31, 2016, fees and/or commissions recorded in connection with these counter indemnities totaled $640.50. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure. In addition, the BBVA Group incurred on cancellation expenses related to one of these counter guarantees and enforcement and mail expenses related to the other counter guarantee which totaled $214,405.37 during this period. In accordance with Council Regulation (EU) Nr. 267/2012 of March 23, 2012, any payments of amounts due to Bank Melli under these counter indemnities were initially blocked and thereafter released upon authorization by the relevant Spanish authorities. The BBVA Group is committed to terminating these business relationships as soon as contractually possible and does not intend to enter into new business relationships involving Bank Melli.

Refund of funds from Bank Sepah. During the year ended December 31, 2016, Bank Sepah returned to the BBVA Group funds in the amount of $4,624.16 which had been originally transferred by the BBVA Group in March 2007 to an account at Bank Sepah in the name of BBVA’s representative office in Tehran, which no longer exists.

Letter of credit. During the year ended December 31, 2015, the BBVA Group had credit exposure to Bank Sepah arising from a letter of credit issued by Bank Sepah to a non-Iranian client of the BBVA Group in Europe. This letter of credit, which was granted before 2004, expired in October 2015. As a result, this letter of credit was no longer outstanding during the year ended December 31, 2016.

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Iranian embassy-related activity. The BBVA Group maintains bank accounts in Spain for two employees of the Iranian embassy in Spain. The two employees are Spanish citizens and one of them retired in 2015. Estimated gross revenues for the year ended December 31, 2016 from embassy-related activity, which include fees and/or commissions, did not exceed $2,490.10. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure. The BBVA Group is committed to terminating these business relationships as soon as legally possible.

C. Organizational Structure

As of December 31, 2016, the BBVA Group was composed of 370 consolidated entities and 89 entities accounted for using the equity method.

The companies are principally domiciled in the following countries: Argentina, Belgium, Bolivia, Brazil, Cayman Islands, Chile, Colombia, Ecuador, France, Germany, Ireland, Italy, Luxembourg, Mexico, Netherlands, Netherlands Antilles, Peru, Portugal, Spain, Switzerland, Turkey, United Kingdom, United States of America, Uruguay and Venezuela. In addition, BBVA has an active presence in Asia.

Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2016.

Subsidiary	Country of Incorporation	Activity	BBVA Voting Power			BBVA Ownership		Total Assets (1)
			(in Percentages)					(In Millions of Euros)
BBVA BANCOMER, S.A. DE C.V.	Mexico	Bank		100.00			100.00		86,242
COMPASS BANK	United States	Bank		100.00			100.00		86,188
TURKIYE GARANTI BANKASI A.S	Turkey	Bank		49.90	(2)		39.90		76,017
BBVA CONTINENTAL, S.A.	Peru	Bank		92.24	(3)		46.12		22,269
BANCO BILBAO VIZCAYA ARGENTARIA CHILE, S.A.	Chile	Bank		68.19			68.19		19,508
BBVA SEGUROS, S.A. DE SEGUROS Y REASEGUROS	Spain	Insurance		99.95			99.95		16,797
BBVA COLOMBIA, S.A.	Colombia	Bank		95.47			95.47		16,391
BBVA BANCO FRANCES, S.A.	Argentina	Bank		75.95			75.95		9,008
PENSIONES BANCOMER, S.A. DE C.V.	Mexico	Insurance		100.00			100.00		4,040
BANCO BILBAO VIZCAYA ARGENTARIA (PORTUGAL), S.A.	Portugal	Bank		100.00			100.00		4,028
SEGUROS BANCOMER, S.A. DE C.V.	Mexico	Insurance		100.00			100.00		3,347
BANCO BILBAO VIZCAYA ARGENTARIA URUGUAY, S.A.	Uruguay	Bank		100.00			100.00		3,051

⁽¹⁾ Information for non-EU subsidiaries has been calculated using the prevailing exchange rates on December 31, 2016.

⁽²⁾ Calculated by adding BBVA’s and the Dogus group’s stakes in Garanti as of December 31, 2016 (39.90% and 10.0002%, respectively). As a result of the shareholders’ agreement between BBVA and Dogus then in effect, Garanti was consolidated within the BBVA Group. See “—Material Contracts—Shareholders’ Agreement in Connection with Garanti.”

⁽³⁾ This figure represents the interest of Holding Continental S.A., which owns 92.24% of the capital stock of BBVA Continental. Each of BBVA and Inversiones Breca S.A. owns 50.00% of the capital stock of Holding Continental S.A. As a result of the shareholders’ agreement entered into between BBVA and Inversiones Breca S.A., BBVA Continental is consolidated within the BBVA Group.

D. Property, Plants and Equipment

We own and rent a substantial network of properties in Spain and abroad, including 3,303 branch offices in Spain and, principally through our various subsidiaries, 5,357 branch offices abroad as of December 31, 2016. As of December 31, 2016, approximately 67% of our branches in Spain and 65% of our branches abroad (excluding those branches relating to the Garanti group) were rented from third parties pursuant to short-term leases that may be renewed by mutual agreement.

65

BBVA, through a real estate company of the Group, is constructing its new corporate headquarters at a development area in the north of Madrid (Spain). As of December 31, 2016, the accumulated investment for this project amounted to €958 million.

In addition, BBVA Bancomer is building its new corporate headquarters in Mexico D.F. As of December 31, 2016, the accumulated investment for this project amounted to €889 million.

E. Selected Statistical Information

The following is a presentation of selected statistical information for the periods indicated. Where required under Industry Guide 3, we have provided such selected statistical information separately for our domestic and foreign activities, pursuant to our calculation that our foreign operations are significant according to Rule 9-05 of Regulation S-X.

Average Balances and Rates

The tables below set forth selected statistical information on our average balance sheets, which are based on the beginning and month-end balances in each year. We do not believe that monthly averages present trends materially different from those that would be presented by daily averages. Interest income figures, when used, include interest income on non-accruing loans to the extent that cash payments have been received. Loan fees are included in the computation of interest revenue.

	Average Balance Sheet - Assets and Interest from Earning Assets
	Year Ended December 31, 2016							Year Ended December 31, 2015							Year Ended December 31, 2014
	Average Balance		Interest		Average Yield (1)			Average Balance		Interest		Average Yield (1)			Average Balance		Interest			Average Yield (1)
	(In Millions of Euros, Except Percentages)
Assets
Cash and balances with central banks and other demand deposits		26,209		10		0.05	%		23,542		2		0.02	%		15,219		4			0.04	%
Debt securities, equity instruments and derivatives		202,388		5,072		2.51	%		211,589		4,673		2.21	%		181,762		4,505			2.48	%
Domestic		133,009		1,772		1.33	%		143,760		1,947		1.35	%		128,539		2,182			1.70	%
Foreign		69,379		3,300		4.76	%		67,829		2,726		4.02	%		53,223		2,323			4.37	%
Loans and receivables		454,299		22,301		4.91	%		421,300		19,881		4.72	%		362,740		18,169			5.01	%
Loans and advances to central banks		15,326		229		1.50	%		12,004		140		1.17	%		11,745		132			1.12	%
Loans and advances to credit institutions		28,078		218		0.78	%		27,171		270		0.99	%		22,811		234			1.03	%
Loans and advances to customers		410,895		21,853		5.32	%		382,125		19,471		5.10	%		328,183		17,803			5.42	%
In euros		201,967		3,750		1.86	%		196,987		4,301		2.18	%		186,965		4,843			2.59	%
Domestic		192,186		3,685		1.92	%		192,508		4,285		2.23	%		186,271		4,844			2.60	%
Foreign		9,781		65		0.66	%		4,479		16		0.37	%		695		(1	)		(0.08	)%
In other currency		208,928		18,104		8.67	%		185,139		15,170		8.19	%		141,218		12,960			9.18	%
Domestic		15,355		348		2.27	%		14,923		284		1.91	%		12,112		263			2.17	%
Foreign		193,573		17,756		9.17	%		170,216		14,886		8.75	%		129,106		12,697			9.83	%
Non-earning assets		52,748		325		0.62	%		49,128		226		0.46	%		40,686		159			0.39	%
Total average assets (2)		735,645		27,708		3.77	%		705,559		24,783		3.51	%		600,407		22,838			3.80	%

⁽¹⁾ Rates have been presented on a non-taxable equivalent basis.

⁽²⁾ Foreign activity represented 49.84% of the total average assets for the year ended December 31, 2016 and 41.86% for the year ended December 31, 2015.

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	Average Balance Sheet - Liabilities and Interest Paid on Interest Bearing Liabilities
	Year Ended December 31, 2016							Year Ended December 31, 2015								Year Ended December 31, 2014
	Average Balance		Interest		Average Yield (1)			Average Balance		Interest			Average Yield (1)			Average Balance		Interest			Average Yield (1)
	(In Millions of Euros, Except Percentages)
Liabilities
Deposits from central banks and credit institutions		101,975		1,866		1.83	%		99,289		1,559			1.57	%		81,860		1,292			1.58	%
Customer deposits		398,851		5,944		1.49	%		366,249		4,390			1.20	%		307,705		4,335			1.41	%
In euros		195,310		766		0.39	%		187,721		1,024			0.55	%		160,946		1,725			1.07	%
Domestic		185,046		739		0.40	%		182,351		1,015			0.56	%		159,980		1,725			1.08	%
Foreign		10,264		26		0.26	%		5,370		9			0.17	%		965		—			—
In other currency		203,541		5,178		2.54	%		178,528		3,366			1.89	%		146,759		2,610			1.78	%
Domestic		11,543		39		0.34	%		9,529		(53	)		(0.55	)%		6,973		(41	)		(0.59	)%
Foreign		191,998		5,139		2.68	%		168,999		3,419			2.02	%		139,786		2,651			1.90	%
Debt certificates and subordinated liabilities		89,876		1,738		1.93	%		89,672		1,875			2.09	%		80,132		1,831			2.29	%
Non-interest-bearing liabilities		89,328		1,101		1.23	%		96,049		936			0.97	%		83,620		998			1.19	%
Stockholders’ equity		55,616		—		—			54,300		—			—			47,091		—			—
Total average liabilities (2)		735,645		10,648		1.45	%		705,559		8,761			1.24	%		600,407		8,456			1.41	%

⁽¹⁾ Rates have been presented on a non-taxable equivalent basis.

⁽²⁾ Foreign activity represented 45.62% of the total average liabilities for the year ended December 31, 2016 and 41.86% for the year ended December 31, 2015.

Changes in Net Interest Income-Volume and Rate Analysis

The following tables allocate changes in our net interest income between changes in volume and changes in rate for 2016 compared with 2015, and 2015 compared with 2014. Volume and rate variance have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. The only out-of-period items and adjustments excluded from the following table are interest payments on loans which are made in a period other than the period in which they are due. Loan fees were included in the computation of interest income.

	2016/2015
	Increase (Decrease) Due to Changes in
	Volume (1)			Rate (2)			Net Change
	(In Millions of Euros)
Interest income
Cash and balances with central banks		—			7			8
Securities portfolio and derivatives		(83	)		482			399
Loans and advances to central banks		45			44			89
Loans and advances to credit institutions		65			(117	)		(52	)
Loans and advances to customers		2,063			319			2,382
In euros		12			(564	)		(552	)
Domestic		(7	)		(593	)		(600	)
Foreign		20			29			48
In other currencies		2,051			883			2,934
Domestic		8			56			64
Foreign		2,043			827			2,870
Other assets		22			77			99
Total income		2,112			813			2,925
Interest expense
Deposits from central banks and credit institutions		82			225			307
Customer deposits		477			1,076			1,553
In euros		23			(282	)		(258	)
Domestic		15			(290	)		(275	)
Foreign		8			9			17
In other currencies		454			1,357			1,812
Domestic		(11	)		103			92
Foreign		465			1,255			1,720
Debt certificates and subordinated liabilities		64			(201	)		(137	)
Other liabilities		(24	)		188			165
Total expense		600			1,288			1,888
Net interest income								1,037

67

⁽¹⁾  The volume effect is calculated as the result of the average interest rate of the earlier period multiplied by the difference between the average balances of both periods.

⁽²⁾  The rate effect is calculated as the result of the average balance of the earlier period multiplied by the difference between the average interest rates of both periods.

	2015/2014
	Increase (Decrease) Due to Changes in
	Volume (1)			Rate (2)			Net Change
	(In Millions of Euros)
Interest income
Cash and balances with central banks		2			(4	)		(1	)
Securities portfolio and derivatives		896			(728	)		168
Loans and advances to central banks		3			5			8
Loans and advances to credit institutions		84			(48	)		36
Loans and advances to customers		4,263			(2,595	)		1,668
In euros		159			(701	)		(542	)
Domestic		162			(721	)		(559	)
Foreign		(3	)		20			17
In other currencies		4,104			(1,894	)		2,210
Domestic		61			(40	)		21
Foreign		4,043			(1,854	)		2,189
Other assets		36			31			67
Total income								1,945
Interest expense
Deposits from central banks and credit institutions		411			(144	)		267
Customer deposits		780			(725	)		56
In euros		241			(943	)		(701	)
Domestic		241			(952	)		(710	)
Foreign		0			9			9
In other currencies		539			218			757
Domestic		(15	)		3			(12	)
Foreign		554			215			769
Debt certificates and subordinated liabilities		274			(231	)		44
Other liabilities		191			(252	)		(62	)
Total expense								305
Net interest income								1,641

⁽¹⁾  The volume effect is calculated as the result of the average interest rate of the earlier period multiplied by the difference between the average balances of both periods.

⁽²⁾  The rate effect is calculated as the result of the average balance of the earlier period multiplied by the difference between the average interest rates of both periods.

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Interest Earning Assets—Margin and Spread

The following table analyzes the levels of our average earning assets and illustrates the comparative gross and net yields and spread obtained for each of the years indicated.

	December 31,
	2016			2015			2014
	(In Millions of Euro, except Percentages)
Average interest earning assets		682,897			647,177			554,457
Gross yield(1)		4.1	%		3.8	%		4.1	%
Net yield(2)		3.8	%		3.5	%		3.8	%
Net interest margin (3)		2.5	%		2.5	%		2.6	%
Average effective rate paid on all interest-bearing liabilities		1.8	%		1.6	%		1.8	%
Spread(4)		2.3	%		2.3	%		2.3	%

⁽¹⁾  Gross yield represents total interest income divided by average interest earning assets.

⁽²⁾  Net yield represents total interest income divided by total average assets.

⁽³⁾  Net interest margin represents net interest income as percentage of average interest earning assets.

⁽⁴⁾  Spread is the difference between gross yield and the average cost of interest-bearing liabilities.

ASSETS

Interest-Bearing Deposits in Other Banks

As of December 31, 2016, interbank deposits (excluding deposits with central banks) represented 4.3% of our total assets. Of such interbank deposits, 21.8% were held outside of Spain and 78.2% in Spain. We believe that our deposits are generally placed with highly rated banks and have a lower risk than many loans we could make in Spain. However, such deposits are subject to the risk that the deposit banks may fail or the banking system of certain of the countries in which a portion of our deposits are made may face liquidity or other problems.

Securities Portfolio

As of December 31, 2016, our total securities portfolio (consisting of investment securities and loans and receivables) was carried on our consolidated balance sheet at a carrying amount (equivalent to its market or appraised value as of such date) of €128,912 million, representing 17.6% of our total assets. €36,022 million, or 27.9%, of our securities portfolio consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2016 on the investment securities that BBVA held was 3.3%, compared with an average yield of approximately 4.9% earned on loans and advances during 2016. See Notes 10 and 12 to the Consolidated Financial Statements. For a discussion of our investments in affiliates, see Note 16 to the Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 2.2.1 and 8 to the Consolidated Financial Statements.

The following tables analyze the carrying amount and fair value of debt securities as of December 31, 2016, December 31, 2015 and December 31, 2014, respectively. The trading portfolio is not included in the tables below because the amortized costs and fair values of these items are the same. See Note 10 to the Consolidated Financial Statements.

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	As of December 31, 2016
	Amortized cost		Fair Value (1)		Unrealized Gains		Unrealized Losses
	(In Millions of Euros)
DEBT SECURITIES -
AVAILABLE FOR SALE PORTFOLIO
Domestic-		24,731		25,540		828		(19	)
Spanish Government and other government agencies debt securities		22,427		23,119		711		(18	)
Other debt securities		2,305		2,421		117		(1	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		986		1,067		82		—
Issued by other institutions		1,319		1,354		36		(1	)
Foreign-		49,253		49,040		773		(987	)
Mexico		11,525		11,200		19		(343	)
Mexican Government and other government agencies debt securities		9,728		9,438		11		(301	)
Other debt securities		1,797		1,763		8		(42	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		86		87		2		(1	)
Issued by other institutions		1,710		1,675		6		(41	)
The United States		14,256		14,043		48		(261	)
U.S. Treasury and other U.S. Government agencies debt securities		1,702		1,683		1		(19	)
States and political subdivisions debt securities		6,758		6,654		8		(112	)
Other debt securities		5,797		5,706		39		(130	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		95		97		2		—
Issued by other institutions		5,702		5,609		37		(130	)
Turkey		5,550		5,443		73		(180	)
Turkey Government and other government agencies debt securities		5,055		4,961		70		(164	)
Other debt securities		495		482		2		(16	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		448		436		2		(15	)
Issued by other institutions		47		46		—		(1	)
Other countries		17,923		18,354		634		(203	)
Other foreign governments and other government agencies debt securities		7,882		8,156		373		(98	)
Other debt securities		10,041		10,197		261		(105	)
Issued by Central Banks		1,657		1,659		4		(2	)
Issued by credit institutions		3,269		3,311		96		(54	)
Issued by other institutions		5,115		5,227		161		(49	)
TOTAL AVAILABLE FOR SALE PORTFOLIO		73,985		74,580		1,601		(1,006	)
HELD TO MATURITY PORTFOLIO
Domestic-		8,625		8,717		92		—
Spanish Government and other government agency debt securities		8,063		8,153		90		—
Other domestic debt securities		562		564		2		—
Issued by Central Banks		—		—		—		—
Issued by credit institutions		494		496		2		—
Issued by other institutions		68		68		—		—
Foreign-		9,071		8,902		16		(185	)
Government and other government agency debt securities		7,982		7,830		13		(165	)
Other debt securities		1,089		1,072		4		(21	)
TOTAL HELD TO MATURITY PORTFOLIO		17,696		17,619		108		(185	)
				—
TOTAL DEBT SECURITIES		91,681		92,199		1,709		(1,192	)

⁽¹⁾ Fair values for listed securities are determined on the basis of their quoted prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

70

	As of December 31, 2015
	Amortized cost		Fair Value (1)		Unrealized Gains		Unrealized Losses
	(In Millions of Euros)
DEBT SECURITIES -
AVAILABLE FOR SALE PORTFOLIO
Domestic-		43,500		45,668		2,221		(53	)
Spanish Government and other government agencies debt securities		38,763		40,799		2,078		(41	)
Other debt securities		4,737		4,869		144		(11	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		2,702		2,795		94		—
Issued by other institutions		2,035		2,074		50		(11	)
Foreign-		62,734		62,641		1,132		(1,226	)
Mexico		12,627		12,465		73		(235	)
Mexican Government and other government agencies debt securities		10,284		10,193		70		(160	)
Other debt securities		2,343		2,272		4		(75	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		260		254		1		(7	)
Issued by other institutions		2,084		2,019		3		(68	)
The United States		13,890		13,717		63		(236	)
U.S. Treasury and other U.S. government agencies debt securities		2,188		2,177		4		(15	)
States and political subdivisions debt securities		4,629		4,612		9		(26	)
Other debt securities		7,073		6,927		50		(195	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		71		75		5		(1	)
Issued by other institutions		7,002		6,852		45		(194	)
Turkey		13,414		13,265		116		(265	)
Turkey Government and other government agencies debt securities		11,801		11,682		111		(231	)
Other debt securities		1,613		1,584		4		(34	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		1,452		1,425		3		(30	)
Issued by other institutions		162		159		1		(4	)
Other countries		22,803		23,194		881		(490	)
Other foreign governments and other government agencies debt securities		9,778		10,356		653		(76	)
Other debt securities		13,025		12,838		227		(414	)
Issued by Central Banks		2,277		2,273		—		(4	)
Issued by credit institutions		3,468		3,488		108		(88	)
Issued by other institutions		7,280		7,077		119		(322	)
TOTAL AVAILABLE FOR SALE PORTFOLIO		106,234		108,310		3,354		(1,278	)
HELD TO MATURITY PORTFOLIO
Domestic-		—		—		—		—
Foreign-		—		—		—		—
TOTAL HELD TO MATURITY PORTFOLIO		—		—		—		—
TOTAL DEBT SECURITIES		106,234		108,310		3,354		(1,278	)

⁽¹⁾  Fair values for listed securities are determined on the basis of their quoted prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

71

	As of December 31, 2014
	Amortized cost		Fair Value (1)		Unrealized Gains		Unrealized Losses
	(In Millions of Euros)
DEBT SECURITIES -
AVAILABLE FOR SALE PORTFOLIO
Domestic-		40,337		42,802		2,542		(77	)
Spanish Government and other government agencies debt securities		34,445		36,680		2,290		(55	)
Other debt securities		5,892		6,122		252		(22	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		3,567		3,716		162		(13	)
Issued by other institutions		2,325		2,406		90		(9	)
Foreign-		43,657		44,806		1,639		(490	)
Mexico		12,662		13,060		493		(96	)
Mexican Government and other government agencies debt securities		10,629		11,012		459		(76	)
Other debt securities		2,034		2,048		34		(20	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		141		142		3		(3	)
Issued by other institutions		1,892		1,906		31		(17	)
The United States		10,289		10,307		102		(83	)
U.S. Treasury and other U.S. government agencies debt securities		1,539		1,542		6		(3	)
States and political subdivisions debt securities		2,672		2,689		22		(5	)
Other debt securities		6,078		6,076		73		(76	)
Issued by Central Banks		—		—		—		—
Issued by credit institutions		24		24		—		—
Issued by other institutions		6,054		6,052		73		(76	)
Other countries		20,705		21,439		1,044		(310	)
Other foreign governments and other government agencies debt securities		10,355		10,966		715		(104	)
Other debt securities		10,350		10,473		329		(206	)
Issued by Central Banks		1,540		1,540		10		(9	)
Issued by credit institutions		3,352		3,471		175		(55	)
Issued by other institutions		5,459		5,461		143		(141	)
TOTAL AVAILABLE FOR SALE PORTFOLIO		83,994		87,608		4,181		(566	)
HELD TO MATURITY PORTFOLIO
Domestic-		—		—		—		—
Foreign-		—		—		—		—
TOTAL HELD TO MATURITY PORTFOLIO		—		—		—		—
TOTAL DEBT SECURITIES		83,994		87,608		4,181		(566	)

⁽¹⁾ Fair values for listed securities are determined on the basis of their quoted prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

72

As of December 31, 2016 the carrying amount of the debt securities classified within the available for sale portfolio by rating categories defined by external rating agencies, were as follows:

	As of December 31, 2016
	Debt Securities Available for Sale
	Carrying Amount (In Millions of Euros)		%
AAA		4,922		6.6	%
AA+		11,172		15.0	%
AA		594		0.8	%
AA-		575		0.8	%
A+		1,230		1.6	%
A		7,442		10.0	%
A-		1,719		2.3	%
BBB+		29,569		39.6	%
BBB		3,233		4.3	%
BBB-		6,809		9.1	%
BB+ or below		2,055		2.8	%
Without rating		5,261		7.1	%
TOTAL		74,580		100.0	%

The following tables analyze the carrying amount and fair value of our ownership of equity securities as of December 31, 2016, 2015 and 2014, respectively. See Note 10 to the Consolidated Financial Statements.

	As of December 31, 2016
	Amortized cost		Fair Value (1)		Unrealized Gains		Unrealized Losses
	(In Millions of Euros)
EQUITY SECURITIES -
AVAILABLE FOR SALE PORTFOLIO
Domestic-		3,748		2,822		19		(945	)
Equity listed		3,690		2,763		17		(944	)
Equity unlisted		57		59		2		(1	)
Foreign-		1,501		1,819		336		(17	)
The United States-		553		588		35		—
Equity listed		16		38		22		—
Equity unlisted		537		550		13		—
Other countries-		948		1,231		301		(17	)
Equity listed		777		1,028		268		(15	)
Equity unlisted		171		203		33		(2	)
TOTAL AVAILABLE FOR SALE PORTFOLIO		5,248		4,641		355		(962	)
TOTAL EQUITY SECURITIES		5,248		4,641		355		(962	)
TOTAL INVESTMENT SECURITIES		96,930		96,839		2,064		(2,154	)

⁽¹⁾  Fair values for listed securities are determined on the basis of their quoted prices at the end of the year. Fair values are used for unlisted securities based on our estimates or on unaudited financial statements, when available.

73

	As of December 31, 2015
	Amortized cost		Fair Value (1)		Unrealized Gains		Unrealized Losses
	(In Millions of Euros)
EQUITY SECURITIES -
AVAILABLE FOR SALE PORTFOLIO
Domestic-		3,476		2,939		22		(559	)
Equity listed		3,402		2,862		17		(558	)
Equity unlisted		74		78		5		(1	)
Foreign-		1,728		2,177		501		(51	)
The United States-		590		616		26		—
Equity listed		41		62		21		—
Equity unlisted		549		554		5		—
Other countries-		1,138		1,561		475		(51	)
Equity listed		986		1,313		371		(44	)
Equity unlisted		152		248		103		(7	)
TOTAL AVAILABLE FOR SALE PORTFOLIO		5,204		5,116		522		(610	)
TOTAL EQUITY SECURITIES		5,204		5,116		522		(610	)
TOTAL INVESTMENT SECURITIES		111,438		113,426		3,876		(1,888	)

⁽¹⁾  Fair values for listed securities are determined on the basis of their quoted prices at the end of the year. Fair values are used for unlisted securities based on our estimates or on unaudited financial statements, when available.

	As of December 31, 2014
	Amortized cost		Fair Value (1)		Unrealized Gains		Unrealized Losses
	(In Millions of Euros)
EQUITY SECURITIES -
AVAILABLE FOR SALE PORTFOLIO
Domestic-		3,177		3,199		93		(71	)
Equity listed		3,129		3,150		92		(71	)
Equity unlisted		48		49		1		—
Foreign-		2,842		4,069		1,263		(36	)
The United States-		540		558		18		—
Equity listed		54		56		2		—
Equity unlisted		486		502		16		—
Other countries-		2,302		3,511		1,245		(36	)
Equity listed		2,172		3,372		1,233		(33	)
Equity unlisted		130		139		12		(3	)
TOTAL AVAILABLE FOR SALE PORTFOLIO		6,019		7,268		1,356		(107	)
TOTAL EQUITY SECURITIES		6,019		7,268		1,356		(107	)
TOTAL INVESTMENT SECURITIES		90,013		94,876		5,537		(673	)

⁽¹⁾  Fair values for listed securities are determined on the basis of their quoted prices at the end of the year. Fair values are used for unlisted securities based on our estimates or on unaudited financial statements, when available.

74

The following table analyzes the maturities of our debt investment and fixed income securities, excluding trading portfolio, by type and geographical area as of December 31, 2016:

	Maturity at One Year or Less				Maturity After One Year to Five Years				Maturity After Five Years to 10 Years				Maturity After 10 Years					Total
	Amount		Yield % (1)		Amount		Yield % (1)		Amount		Yield % (1)		Amount			Yield % (1)		Amount
	(Millions of Euros, Except Percentages)
DEBT SECURITIES
AVAILABLE-FOR-SALE PORTFOLIO
Domestic
Spanish government and other government agencies debt securities		956		3.32		4,101		3.35		12,755		3.28		5,307			4.93		23,119
Other debt securities		702		3.96		2,592		3.11		1,247		2.90		(2,121	)		4.63		2,421
Total Domestic		1,658		3.49		6,693		3.91		14,003		3.31		3,186			4.83		25,540
Foreign
Mexico		290		2.29		4,797		4.21		2,529		1.71		3,585			7.42		11,200
Mexican Government and other government agencies debt securities		248		1.53		3,688		3.97		2,350		1.31		3,152			7.61		9,438
Other debt securities		42		6.72		1,108		5.08		179		3.45		433			5.95		1,763
The United States		806		1.10		1,647		2.93		1,790		2.76		9,800			1.90		14,043
U.S. Treasury and other government agencies debt securities		518		0.24		161		1.35		202		1.93		803			1.54		1,683
States and political subdivisions debt securities		168		2.03		197		2.02		412		2.01		5,877			1.85		6,654
Other debt securities		120		3.20		1,290		3.26		1,176		3.17		3,120			2.10		5,706
Turkey		65		7.93		2,887		9.60		2,479		9.91		12			6.68		5,443
Turkey Government and other government agencies debt securities		5		7.95		2,482		9.93		2,462		9.93		12			6.68		4,961
Other debt securities		60		7.93		405		5.77		18		5.64		—			—		482
Other countries		3,358		6.49		7,586		3.56		3,922		3.59		3,487			3.44		18,354
Securities of other foreign governments(2)		870		2.57		3,112		3.92		1,679		2.47		2,495			3.22		8,156
Other debt securities of other countries		2,488		7.71		4,474		3.29		2,243		4.46		993			4.05		10,197
Total Foreign		4,519		5.21		16,917		4.68		10,721		4.40		16,884			3.43		49,040
TOTAL AVAILABLE-FOR-SALE		6,177		4.79		23,610		4.33		24,723		3.75		20,070			3.72		74,580
HELD-TO-MATURITY PORTFOLIO
Domestic
Spanish government		2,193		3.53		3,116		4.63		850		2.28		1,905			3.08		8,063
Other debt securities		326		3.99		236		2.93		—		—		—			—		562
Total Domestic		2,519		3.59		3,351		4.51		850		2.28		1,905			3.08		8,625
Total Foreign		244		5.86		4,333		6.15		2,617		9.06		1,877			5.44		9,071
TOTAL HELD-TO-MATURITY		2,763		3.79		7,685		5.43		3,467		7.38		3,782			4.28		17,696
TOTAL DEBT SECURITIES		8,940		4.48		31,295		4.60		28,190		4.20		23,852			3.81		92,277

⁽¹⁾  Rates have been presented on a non-taxable equivalent basis.

⁽²⁾  Securities of other foreign governments mainly include investments made by our subsidiaries in securities issued by the governments of the countries where they operate.

75

Loans and Advances to Credit Institutions and Central Banks

As of December 31, 2016, our total loans and advances to credit institutions and central banks amounted to €40,235 million, or 5.5% of total assets. Net of our valuation adjustments, loans and advances to credit institutions and central banks amounted to €40,267 million as of December 31, 2016, or 5.5% of our total assets.

Loans and Advances to Customers

As of December 31, 2016, our total loans and advances amounted to €430,629 million, or 58.8% of total assets. Net of our valuation adjustments, loans and advances amounted to €414,655 million as of December 31, 2016, or 56.7% of our total assets. As of December 31, 2016 our loans and advances in Spain amounted to €182,492 million. Our foreign loans and advances amounted to €248,137 million as of December 31, 2016. For a discussion of certain mandatory ratios relating to our loan portfolio, see “—Business Overview—Supervision and Regulation—Capital Requirements” and “—Business Overview— Supervision and Regulation—Investment Ratio”.

Loans by Geographic Area

The following table shows, by domicile of the customer, our net loans and advances as of December 31, 2016, 2015, 2014, 2013 and 2012:

	As of December 31,
	2016			2015			2014			2013			2012
	(In Millions of Euros)
Domestic		182,492			192,227			178,410			188,434			201,401
Foreign
Europe		25,763			23,327			19,696			18,650			21,171
Turkey		54,174			54,252			—			—			—
Mexico		50,242			51,842			49,904			41,823			43,073
South America		53,512			47,862			53,616			50,291			50,507
The United States		60,388			58,677			47,819			35,858			36,992
Other		4,058			4,735			3,586			3,606			3,378
Total foreign		248,137			240,695			174,620			150,228			155,121
Total loans and advances		430,629			432,921			353,030			338,662			356,521
Impairment losses		(15,974	)		(18,691	)		(14,244	)		(14,950	)		(14,115	)
Total net lending (1)		414,655			414,230			338,785			323,712			342,406

⁽¹⁾ Total net lending includes financial assets held for trading for loans and advances to customers.

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Loans by Type of Customer

The following table shows, by domicile and type of customer, our net loans and advances at each of the dates indicated. The classification by type of customer is based principally on regulatory authority requirements in each country.

	As of December 31,
	2016			2015			2014			2013			2012
	(In Millions of Euros)
Domestic
Government		20,741			23,549			23,421			22,287			21,639
Agriculture		1,076			1,064			1,221			1,281			1,400
Industrial		13,670			15,079			13,507			13,844			16,227
Real estate and construction		15,179			18,621			20,170			25,456			30,294
Commercial and financial		13,111			11,557			18,439			15,615			17,007
Loans to individuals (1)		102,299			105,157			86,362			90,838			94,912
Other		16,415			17,200			15,289			19,113			19,921
Total Domestic		182,492			192,227			178,410			188,434			201,401
Foreign
Government		14,132			15,062			13,691			10,314			14,846
Agriculture		3,236			3,251			3,127			3,727			3,334
Industrial		43,402			41,834			24,072			14,985			14,479
Real estate and construction		21,822			20,343			12,982			15,243			16,890
Commercial and financial		33,933			32,019			25,441			31,802			34,862
Loans to individuals		89,981			89,132			72,223			59,840			56,207
Other		41,630			39,054			23,082			14,318			14,502
Total Foreign		248,137			240,695			174,620			150,228			155,121
Total Loans and Advances		430,629			432,921			353,030			338,662			356,521
Impairment losses		(15,974	)		(18,691	)		(14,244	)		(14,950	)		(14,115	)
Total net lending (2)		414,655			414,230			338,785			323,712			342,406

⁽¹⁾ Includes mortgage loans to households for the acquisition of housing.

⁽²⁾ Total net lending includes financial assets held for trading for loans and advances to customers.

The following table sets forth a breakdown, by currency, of our net loan portfolio as of December 31, 2016, 2015, 2014, 2013 and 2012:

	As of December 31,
	2016		2015		2014		2013		2012
	(In Millions of Euros)
In euros		199,289		204,549		182,903		190,135		211,446
In other currencies		215,366		209,681		155,882		133,578		130,959
Total net lending (1)		414,655		414,230		338,785		323,713		342,406

⁽¹⁾ Total net lending includes financial assets held for trading for loans and advances to customers.

77

As of December 31, 2016, loans by BBVA and its subsidiaries to associates and jointly controlled companies amounted to €442 million, compared with €710 million as of December 31, 2015. Loans outstanding to the Spanish government and its agencies amounted to €20,741 million, or 4.8% of our total loans and advances as of December 31, 2016, compared with €23,549 million, or 5.4% of our total loans and advances as of December 31, 2015. None of our loans to companies controlled by the Spanish government are guaranteed by the government and, accordingly, we apply normal credit criteria in extending credit to such entities. Moreover, we carefully monitor such loans because governmental policies necessarily affect such borrowers.

Diversification in our loan portfolio is our principal means of reducing the risk of loan losses. We also carefully monitor our loans to borrowers in sectors or countries experiencing liquidity problems. Our exposure to our five largest borrowers as of December 31, 2016, excluding government-related loans, amounted to €19,604 million or approximately 4.6% of our total outstanding loans and advances. As of December 31, 2016 there did not exist any concentration of loans exceeding 10% of our total outstanding loans and advances, other than by category as disclosed in the table above.

Maturity and Interest Sensitivity

The following table sets forth an analysis by maturity of our total loans and advances by domicile of the office that issued the loan and the type of customer as of December 31, 2016. The determination of maturities is based on contract terms.

	Maturity
	Due in One Year or Less		Due After One Year Through Five Years		Due After Five Years		Total
	(In Millions of Euros)
Domestic
Government		9,087		7,059		4,595		20,741
Agriculture		423		427		227		1,076
Industrial		6,158		4,332		3,180		13,670
Real estate and construction		4,704		4,285		6,190		15,179
Commercial and financial		7,893		3,656		1,562		13,111
Loans to individuals		11,114		23,152		68,034		102,299
Other		6,247		6,059		4,108		16,415
Total Domestic		45,626		48,970		87,896		182,492
Foreign
Government		805		2,322		11,005		14,132
Agriculture		1,742		884		610		3,236
Industrial		15,302		17,315		10,785		43,402
Real estate and construction		6,852		10,167		4,804		21,822
Commercial and financial		20,718		10,313		2,902		33,933
Loans to individuals		17,513		22,150		50,318		89,981
Other		12,401		19,924		9,305		41,630
Total Foreign		75,332		83,074		89,730		248,136
Total Loans and Advances		120,958		132,044		177,626		430,629

The following table sets forth a breakdown of our fixed and variable rate loans which had a maturity of one year or more as of December 31, 2016.

	Interest Sensitivity of Outstanding Loans and Advances Maturing in One Year or More
	Domestic		Foreign		Total
	(In Millions of Euros)
Fixed rate		12,320		92,683		105,003
Variable rate		124,546		80,121		204,667
Total loans and advances		136,866		172,804		309,669

78

Impairment Losses on Loans and Advances

For a discussion of loan loss reserves, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—Impairment losses on financial assets” and Note 2.2.1 to the Consolidated Financial Statements.

The following table provides information, by domicile of customer, regarding our loan loss reserve and movements of loan charge-offs and recoveries for periods indicated.

	As of and for the year ended December 31,
	2016			2015			2014			2013			2012
	(In Millions of Euros, Except Percentages)
Loan loss reserve at beginning of period:
Domestic		12,357			9,832			10,510			9,638			4,689
Foreign		6,385			4,441			4,480			4,506			4,440
Total loan loss reserve at beginning of period		18,742			14,273			14,990			14,144			9,129
Loans charged off:
Total domestic (1)		(3,298	)		(3,340	)		(2,628	)		(1,965	)		(2,283	)
Total foreign (2)		(2,400	)		(1,933	)		(1,836	)		(1,709	)		(1,824	)
Total loans charged off:		(5,698	)		(5,273	)		(4,464	)		(3,674	)		(4,107	)
Provision for possible loan losses:
Domestic		1,095			1,933			2,308			3,420			5,868
Foreign		3,046			2,804			2,439			2,522			2,287
Total provision for possible loan losses		4,141			4,737			4,747			5,942			8,155
Acquisition and disposition of subsidiaries(3)		—			6,572			—			(30	)		2,066
Effect of foreign currency translation		(601	)		(862	)		(119	)		(557	)		40
Other		(567	)		(705	)		(881	)		(835	)		(1,139	)
Loan loss reserve at end of period:
Domestic		9,113			12,357			9,832			10,510			9,638
Foreign		6,903			6,385			4,441			4,480			4,506
Total Loan loss reserve at end of period		16,016			18,742			14,273			14,990			14,144
Loan loss reserve as a percentage of total loans and receivables at end of period		3.44	%		3.97	%		3.80	%		4.27	%		3.81	%
Net loan charge-offs as a percentage of total loans and receivables at end of period		1.22	%		1.11	%		1.19	%		1.05	%		1.11	%

⁽¹⁾  Domestic loans charged off in 2016 and 2015 were mainly related to the real estate sector.

⁽²⁾  Foreign loans charged off in 2016 include €2,012 million related to real estate loans and loans to individuals and others and €361 million related to commercial and financial loans. Loans charged off in 2015 include €1,904 million related to real estate loans and loans to individuals and others and €16 million related to commercial and financial loans.

⁽³⁾  Includes amounts related to the acquisition of Garanti and Catalunya Banc in 2015. See Note 18 to the Consolidated Financial Statements.

79

When the recovery of any recognized amount is considered to be remote, this amount is removed from the consolidated balance sheet, without prejudice to any actions taken by the consolidated entities in order to collect the amount until their rights extinguish in full through expiry, forgiveness or for other reasons.

The loans charged off amounted to €5,698 million during the year ended December 31, 2016 compared with €5,239 million during the year ended December 31, 2015.

Our loan loss reserves as a percentage of total loans and advances increased to 3.4% as of December 31, 2016 from 4.0 % as of December 31, 2015.

Impaired Loans

As described in Note 2.2.1 to the Consolidated Financial Statements, loans are considered to be impaired loans when there are reasonable doubts that the loans will be recovered in full and/or the related interest will be collected for the amounts and on the dates initially agreed upon, taking into account the guarantees received by the consolidated entities to ensure (in part or in full) the performance of the loans.

Amounts collected in relation to impaired loans and receivables are used to recognize the related accrued interest and any excess amount is used to reduce the unpaid principal. The approximate amount of interest income on our impaired loans which was included in profit attributable to parent company in 2016, 2015, 2014, 2013 and 2012 was €264.2 million, €253.9 million, €231.2 million, €253.3 million and €228.1 million, respectively.

The following table provides information regarding our impaired loans, by domicile and type of customer, as of the dates indicated:

	As of December 31,
	2016			2015			2014			2013			2012
	(In Millions of Euros)
Impaired loans
Domestic		16,360			19,481			18,563			20,985			15,165
Public sector		270			191			172			158			145
Other resident sector		16,090			19,290			18,391			20,826			15,019
Foreign		6,565			5,882			4,167			4,493			4,836
Public sector		42			21			8			11			20
Other non-resident sector		6,523			5,860			4,159			4,482			4,816
Total impaired loans		22,925			25,363			22,730			25,478			20,001
Total loan loss reserve		(16,016	)		(18,742	)		(14,273	)		(14,990	)		(14,144	)
Impaired loans net of reserves		6,908			6,621			8,457			10,488			5,857

Our total impaired loans amounted to €22,925 million as of December 31, 2016, a 9.6% decrease compared with €25,363 million as of December 31, 2015. This decrease was mainly attributable to a decline in domestic impaired loans, particularly in the real estate sector.

As mentioned in Note 2.2.1 to the Consolidated Financial Statements, our loan loss reserve includes loss reserve for impaired assets and loss reserve for unimpaired assets but which present an inherent loss. As of December 31, 2016, the loan loss reserve amounted to €16,016 million, a 14.5% decrease compared with €18,742 million as of December 31, 2015. This decrease in our loan loss reserve is mainly attributable to a decline in domestic impaired loans, particularly in the real estate sector.

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The following tables provide information, by domicile and type of customer, regarding our impaired loans and the loan loss reserves to customers taken for each impaired loan category, as of December 31, 2016 and 2015:

	Impaired Loans		Loan Loss Reserve			Impaired Loans as a Percentage of Loans by Category
	(In Millions of Euros)
Domestic:
Government		270		(31	)		1.30	%
Credit institutions		—		—			0.00	%
Other sectors		16,090		(7,385	)		9.95	%
Agriculture		104		(47	)		9.64	%
Industrial		1,134		(581	)		8.29	%
Real estate and construction		6,262		(3,521	)		41.25	%
Commercial and other financial		1,206		(731	)		9.19	%
Loans to individuals		5,992		(1,744	)		5.86	%
Other		1,392		(761	)		8.48	%
Total Domestic		16,360		(7,416	)		8.96	%
Foreign:
Government		42		(12	)		0.30	%
Credit institutions		10		(7	)		0.00	%
Other sectors		6,523		(3,356	)		2.79	%
Agriculture		117		(67	)		3.62	%
Industrial		1,159		(457	)		2.67	%
Real estate and construction		537		(245	)		2.46	%
Commercial and other financial		661		(346	)		1.95	%
Loans to individuals		2,809		(1,573	)		3.12	%
Other		1,240		(675	)		2.98	%
Total Foreign		6,565		(3,375	)		2.65	%
General reserve		—		(5,224	)
Total impaired loans		22,925		(16,016	)		5.65	%

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	Impaired Loans		Loan Loss Reserve			Impaired Loans as a Percentage of Loans by Category
	(In Millions of Euros)
Domestic:
Government		191		(34	)		0.81	%
Credit institutions		—		—			—
Other sectors		19,290		(9,468	)		11.44	%
Agriculture		107		(44	)		10.06	%
Industrial		1,657		(1,020	)		10.99	%
Real estate and construction		7,732		(4,534	)		41.52	%
Commercial and other financial		1,284		(746	)		11.11	%
Loans to individuals		5,977		(1,942	)		5.68	%
Other		2,533		(1,182	)		14.71	%
Total Domestic		19,481		(9,502	)		10.13	%
Foreign:
Government		21		(11	)		0.14	%
Credit institutions		30		(23	)		0.09	%
Other sectors		5,831		(3,291	)		2.58	%
Agriculture		124		(64	)		3.82	%
Industrial		776		(412	)		1.85	%
Real estate and construction		400		(246	)		1.97	%
Commercial and other financial		612		(314	)		1.91	%
Loans to individuals		2,840		(1,572	)		3.19	%
Other		1,078		(684	)		2.75	%
Total Foreign		5,882		(3,324	)		2.44	%
General reserve		—		(5,916	)
Total impaired loans		25,363		(18,742	)		5.87	%

Troubled Debt Restructurings

As of December 31, 2016, “troubled debt restructurings”, as described in Appendix XI to our Consolidated Financial Statements, totaling €11,418 million were not considered impaired loans.

Potential Problem Loans

The identification of “Potential problem loans” is based on the analysis of historical non-performing asset ratio trends, categorized by products/clients and geographical locations. This analysis is focused on the identification of portfolios with non-performing asset ratio higher than our average non-performing asset ratio. Once these portfolios are identified, we segregate such portfolios into groups with similar characteristics based on the activities to which they are related, geographical location, type of collateral, solvency of the client and loan to value ratio.

The non-performing asset ratio in our domestic real estate and construction portfolio was 41.2% as of December 31, 2016 (compared with 41.5% as of December 31, 2015), substantially higher than the average non-performing asset ratio for all of our domestic activities (9.0% as of December 31, 2016 and 10.1% as of December 31, 2015) and the average non-performing asset ratio for all of our consolidated activities (4.9% as of December 31, 2016 and 5.4% as of December 31, 2015). Within such portfolio, construction loans and property development loans (which exclude mainly infrastructure and civil construction) had a non-performing asset ratio of 25.3% as of December 31, 2016 (compared with 23.7% as of December 31, 2015). Given such non-performing asset ratio, we performed an analysis in order to define the level of loan provisions attributable to these loan portfolios (see Note 2.2.1 to our Consolidated Financial Statements).

Foreign Country Outstandings

The following table sets forth, as of the end of the years indicated, the aggregate amounts of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked) where outstandings in the borrower’s country exceeded 1% of our total assets as of December 31, 2016, December 31, 2015 and December 31, 2014. Cross-border outstandings do not include loans in local currency made

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by our subsidiary banks to customers in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the vast majority of the loans made by our subsidiaries in South America, Mexico, Turkey and the United States or other regions which are not listed below.

	2016					2015					2014
	Amount		% of Total Assets			Amount		% of Total Assets			Amount		% of Total Assets
	(In Millions of Euros, Except Percentages)
United Kingdom		5,854		0.8	%		7,306		1.0	%		5,816		0.9	%
Mexico		1,947		0.3	%		2,134		0.3	%		1,606		0.3	%
Turkey		1,665		0.2	%		1,974		0.3	%		—		—
Other OECD		7,745		1.1	%		8,124		1.1	%		6,162		1.0	%
Total OECD		17,211		2.4	%		19,538		2.7	%		13,584		2.1	%
Central and South America		4,001		0.6	%		3,434		0.5	%		2,850		0.4	%
Other		4,056		0.6	%		4,888		0.7	%		4,773		0.7	%
Total		25,268		3.5	%		27,860		3.8	%		21,207		3.3	%

The following table sets forth the amounts of our cross-border outstandings as of December 31 of the years indicated below by type of borrower where outstandings in the borrower’s country exceeded 1% of our total assets.

	Governments		Banks and Other Financial Institutions		Commercial, Industrial and Other		Total
	(In Millions of Euros)
As of December 31, 2016
Mexico		160		5		1,781		1,947
Turkey		105		439		1,120		1,665
United Kingdom		—		3,732		2,122		5,854
Total		266		4,176		5,024		9,466
As of December 31, 2015
Mexico		166		4		1,965		2,134
United Kingdom		—		4,661		2,646		7,306
Total		166		4,665		4,611		9,440
As of December 31, 2014
Mexico		125		17		1,646		1,606
United Kingdom		—		2,999		2,817		5,816
Total		125		3,016		4,463		7,422

The Bank of Spain requires that minimum reserves be maintained for cross-border risk arising with respect to loans and other outstandings to countries, or residents of countries, falling into certain categories established by the Bank of Spain on the basis of the level of perceived transfer risk. The category that a country falls into is determined by us, subject to review by the Bank of Spain.

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The following table shows the minimum required reserves with respect to each category of country for BBVA’s level of coverage as of December 31, 2016.

Categories(1)	Minimum Percentage of Coverage (Outstandings Within Category)
Countries belonging to the OECD whose currencies are listed in the Spanish foreign exchange market		0.0
Countries with transitory difficulties(2)		10.1
Doubtful countries(2)		22.8
Very doubtful countries(2)(3)		83.5
Bankrupt countries(4)		100.0

⁽¹⁾  Any outstanding which is guaranteed may be treated, for the purposes of the foregoing, as if it were an obligation of the guarantor.

⁽²⁾  Coverage for the aggregate of these three categories (countries with transitory difficulties, doubtful countries and very doubtful countries) must equal at least 35% of outstanding loans within the three categories. The Bank of Spain has recommended up to 50% aggregate coverage.

⁽³⁾  Outstandings to very doubtful countries are treated as impaired under Bank of Spain regulations.

⁽⁴⁾  Outstandings to bankrupt countries must be charged off immediately. As a result, no such outstandings are reflected on our consolidated balance sheet. Notwithstanding the foregoing minimum required reserves, certain interbank outstandings with an original maturity of three months or less have minimum required reserves of 50%. We met or exceeded the minimum percentage of required coverage with respect to each of the foregoing categories.

Our exposure to borrowers in countries with difficulties (the last four categories in the foregoing table), excluding our exposure to subsidiaries or companies we manage and trade-related debt, amounted to €104 million, €130 million and €192 million as of December 31, 2016, 2015 and 2014, respectively. These figures do not reflect loan loss reserves of 35.6%, 29.2%, and 16.7% respectively, of the relevant amounts outstanding at such dates. Deposits with or loans to borrowers in all such countries as of December 31, 2016 did not in the aggregate exceed 0.01% of our total assets.

The country-risk exposures described in the preceding paragraph as of December 31, 2016, 2015 and 2014 do not include exposures for which insurance policies have been taken out with third parties that include coverage of the risk of confiscation, expropriation, nationalization, non-transfer, non-convertibility and, if appropriate, war and political violence. The sums insured as of December 31, 2016, 2015 and 2014 amounted to $90 million, $81 million and $118 million, respectively (approximately €85 million, €74 million and €97 million, respectively, based on a euro/dollar exchange rate on December 31, 2016 of $1.00 = €0.95, on December 31, 2015 of $1.00 = €0.92, and on December 31, 2014 of $1.00 = €0.82).

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LIABILITIES

Deposits

The principal components of our customer deposits are domestic demand and savings deposits and foreign time deposits. The following tables provide information regarding our deposits by principal geographic area for the dates indicated.

	As of December 31, 2016
	Customer Deposits		Bank of Spain and Other Central Banks		Other Credit Institutions		Total
	(In Millions of Euros)
Total Domestic		161,022		26,602		6,768		186,771
Foreign
Europe		30,949		101		38,338		69,388
Mexico		54,117		2,400		3,663		69,034
South America		50,282		2,407		4,035		57,658
The United States		62,311		38		5,040		67,995
Turkey		38,211		3,191		1,463		44,021
Other		4,572		—		4,194		8,766
Total Foreign		240,442		8,138		56,733		316,863
Total		401,465		34,740		63,501		503,634

	As of December 31, 2015
	Customer Deposits		Bank of Spain and Other Central Banks		Other Credit Institutions		Total
	(In Millions of Euros)
Total Domestic		168,689		19,014		8,262		195,965
Foreign
Europe		35,770		101		39,896		75,767
Mexico		51,422		11,254		1,643		64,319
South America		44,469		3,341		4,423		52,233
The United States		62,988		619		7,391		70,998
Other		36,036		4,348		1,786		42,170
Total Foreign		3,988		1,411		5,142		10,541
Total		234,673		21,073		60,281		316,027
		403,362		40,087		68,543		511,992
	As of December 31, 2014
	Customer Deposits		Bank of Spain and Other Central Banks		Other Credit Institutions		Total
	(In Millions of Euros)
Total Domestic		143,721		17,568		10,213		171,502
Foreign
Europe		18,187		101		39,004		57,292
Mexico		46,678		8,596		3,063		58,337
South America		58,239		1,091		6,402		65,732
The United States		50,902		—		4,610		55,512
Other		1,607		824		1,725		4,156
Total Foreign		175,613		10,611		54,804		241,028
Total		319,334		28,178		65,017		412,529

For an analysis of our deposits, including non-interest bearing demand deposits, interest-bearing demand deposits, saving deposits and time deposits, see Note 22 to the Consolidated Financial Statements.

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As of December 31, 2016, the maturity of our time deposits (excluding interbank deposits) in denominations of $100,000 or greater was as follows:

	As of December 31, 2016
	Domestic		Foreign		Total
	(In Millions of Euros)
3 months or under		11,956		42,538		54,495
Over 3 to 6 months		6,546		7,805		14,351
Over 6 to 12 months		10,353		12,064		22,417
Over 12 months		11,828		10,811		22,639
Total		40,682		73,219		113,902

Time deposits from Spanish and foreign financial institutions amounted to €30,826 million as of December 31, 2016, substantially all of which were in excess of $100,000.

Large denomination deposits may be a less stable source of funds than demand and savings deposits because they are more sensitive to variations in interest rates. For a breakdown by currency of customer deposits as of December 31, 2016, 2015 and 2014, see Note 22 to the Consolidated Financial Statements.

Short-term Borrowings

Securities sold under agreements to repurchase and promissory notes issued by us constituted the only categories of short-term borrowings that equaled or exceeded 30% of stockholders’ equity as of December 31, 2016, 2015 and 2014.

	As of and for the Year Ended December 31, 2016					As of and for the Year Ended December 31, 2015					As of and for the Year Ended December 31, 2014
	Amount		Average rate			Amount		Average rate			Amount		Average rate
	(In Millions of Euro, Except Percentages)
Securities sold under agreements to repurchase (principally Spanish treasury bills):
As of end of period		39,682		1.6	%		50,342		1.0	%		48,538		0.6	%
Average during period		39,589		1.4	%		47,954		0.9	%		45,702		0.9	%
Maximum quarter-end balance		41,399		—			50,342		—			48,538		—
Bank promissory notes:
As of end of period		1,033		0.2	%		516		0.3	%		1,070		1.7	%
Average during period		883		0.7	%		2,239		1.0	%		1,000		1.4	%
Maximum quarter-end balance		1,079		—			3,354		—			1,107		—
Bonds and subordinated debt :
As of end of period		14,708		3.7	%		14,741		3.4	%		15,070		3.7	%
Average during period		15,092		3.5	%		15,320		2.2	%		14,791		3.0	%
Maximum quarter-end balance		16,016		—			15,693		—			15,503		—
Total short-term borrowings as of end of period		55,423		2.1	%		65,598		1.5	%		64,677		1.3	%

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Return Ratios

The following table sets out our return ratios:

	As of or for the Year Ended December 31,
	2016			2015			2014
	(In Percentages)
Return on stockholders’ funds (1)		6.7	%		5.3	%		5.6	%
Return on assets(2)		0.6	%		0.5	%		0.5	%
Dividend pay-out ratio(3)		33.5			45.9			24.7
Equity to assets ratio(4)		7.6	%		7.7	%		7.8	%

⁽¹⁾  Represents profit attributable to parent company for the year as a percentage of average stockholder’s funds for the year, excluding “Non-controlling interest”.

⁽²⁾  Represents profit attributable to parent company as a percentage of average total assets for the year.

⁽³⁾  Represents dividends declared by BBVA (including the cash remuneration paid under the “Dividend Option” scheme) as a percentage of profit attributable to parent company. This ratio does not take into account the non-cash remuneration paid by BBVA under the “Dividend Option” scheme (in the form of BBVA shares or ADSs). See “—Business Overview—Supervision and Regulation—Dividends—Scrip Dividend” and “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends”.

⁽⁴⁾  Represents average total equity over average total assets.

F. Competition

The commercial banking sector in Spain has undergone significant consolidation. In the majority of the markets where we provide financial services, the Banco Santander Group is our largest competitor, but the restructuring processes that have been underway for several years have increased the size of certain banks, such as Bankia (an integration of seven regional saving banks, led by Caja Madrid), Caixabank (which acquired Banco de Valencia, Banca Cívica and Barclays’s Spanish operations), Banco Popular and Banco Sabadell.

We face strong competition in all of our principal areas of operations. The low interest rate environment which depresses interest income and the ongoing de-leveraging process makes competition quite fierce in the Spanish market. In particular, competition is particularly intense in the credit market for lending to small and medium enterprises (SMEs), where new credit interest rates have fallen from an average of 5.0% by mid-2014 to around 2.3% at December 2016, getting closer to not covering credit costs.

In addition, in the aftermath of the financial crisis, the need for a more balanced funding structure led to increased competition for deposits in Spain. While the low interest rate environment has depressed deposits’ remuneration, there seems to be a zero interest rate floor as deposit rates are not entering negative territory. The Bank of Spain, through its Circular 3/2011, of June 30, required that a higher contribution be made to the Deposit Guarantee Scheme (DGS) in connection with deposits the remuneration of which exceeded certain thresholds dependent on the evolution of the Euribor. However, this requirement was removed in the summer of 2012. Former Spanish savings banks, many of which have become banks and received financial or other forms of support from the Spanish government and the European Stability Mechanism, and money market mutual funds provide strong competition for savings deposits and, in the case of savings banks, for other retail banking services. While the European Commission has imposed certain size limits on institutions receiving public capital, such limits only affect entities that account for around 30% of the total assets of the Spanish financial system which, in addition, have a relatively long period (five years) to comply with such limits. Some of these entities remain particularly active in some sectors, for example, in lending to SMEs.

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Credit cooperatives, which are active principally in rural areas where they provide savings and loan services and related services such as the financing of agricultural machinery and supplies, are also a source of competition. The entry of “fintech companies” and on-line banks into the Spanish banking system has also increased competition, especially in payment services. Insurance companies and other financial service firms also compete for customer funds. In addition, despite their recent decline, the high interest rates offered by Spanish public debt has made it a strong competitor for deposits. Like commercial banks, former savings banks, insurance companies and other financial service firms are expanding the services offered to consumers in Spain. We face competition in mortgage loans from saving banks and, to a lesser extent, cooperatives.

Furthermore, the EU Directive on Investment Services took effect on December 31, 1995. The EU Directive permits all brokerage houses authorized to operate in other member states of the EU to carry out investment services in Spain. Although the EU Directive is not specifically addressed to banks, it affects the activities of banks operating in Spain. Besides, several initiatives have been implemented recently in order to facilitate the creation of a Pan-European financial market. For example, SEPA (Single Euro Payments Area), which is a payment-integration initiative for simplification of bank transfers, direct debits and payment cards mainly within the EU and the MiFID project (Markets in Financial Instruments Directive), which aims to create a European framework for investment services. In addition, decisive steps are being taken towards achieving a banking union in Europe (as agreed at a Eurogroup meeting in June 2012). The ECB started to work as a single supervisor in November 2014, supervising around 123 entities (including us) in the Eurozone. In addition, the foundations of a single resolution mechanism were set with the agreement on the regulation and contributions to the Fund and the appointment of the SRB which is operational since January 1, 2015. In addition, a new instrument of bank direct recapitalization was created within the ESM. The bail-in tool included in the BRRD entered into force on January 1, 2016. The creation of a common deposit-guarantee scheme (the EDIS) was proposed by the European Commission in November 2015 in order to complete the current banking union process. More recently, in November 2016, the Bank of Spain Circular 7/2016 entered into force and modified the calculation of provisions by Spanish banks.

Following the financial turmoil, a number of banks have disappeared or have been absorbed by other banks. We believe this trend will likely continue in the future, with a number of mergers and acquisitions between financial entities both domestically and at the European level. In Spain, the recapitalization of several entities with public funds and their subsequent privatization, with the purpose of achieving a stronger banking sector, has intensified this process. In this vein, it is possible that Bankia and BMN merge, as the FROB owns more than 60% of both entities. In the U.S., the government has facilitated the purchase of troubled banks by other competitors, and European governments, including the Spanish government, have expressed their willingness to facilitate these types of operations.

In the United States, where we operate primarily through BBVA Compass, the competitive landscape has also been significantly affected by the financial crisis. The U.S. banking industry has experienced significant impairment of its assets since 2009, which resulted in losses in selected product categories and slow loan growth. U.S. commercial banks have largely recovered from the crisis, although the mortgage delinquency rate remained high at 4.25% in December 2016, according to the Federal Reserve. Commercial banks continue to make strides toward healthy balance sheets, with delinquency and charge-off rates falling throughout 2016. Consumer delinquencies of the system have actually fallen below pre-crisis levels. Commercial real estate asset quality has also improved steadily with the delinquency rate at 0.84% as of December 31, 2016 according to the Federal Reserve. Asset quality has improved since the crisis, and we expect these positive trends to continue on the back of rising economic confidence despite increased uncertainty due to the new administration.

In Turkey, where we operate through Garanti, competition remains high mainly from the three public banks operating in the region, which accounted for 33% of total loans as of December 31, 2016, and from private banks, with an estimated aggregate market share (including Garanti) of approximately 58% as of December 2016. Development banks and the so called “participation banks” (banks that operate under the ethos of Islamic banking) accounted for the remaining 9%. During 2016, credit in Turkey grew at a more moderate pace than in prior years given the uncertainties in foreign and domestic markets, although it grew at double-digit rates year-on-year in local currency. Overall loans to individuals in Turkey increased by 17% in local currency during 2016 (source: BRSA). Adjusted for the effect of the depreciation of the Turkish lira, such rate would be closer to 11%. Growth in customer funds also slowed in 2016, although it remained at double digit rates year-on-year in local currency (deposits grew by 17% in 2016 in local currency).

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In Mexico, where we operate through BBVA Bancomer, the banking industry remained solvent throughout the financial crisis. The banking system has remained solid during 2016, with total bank lending showing double-digit growth, although slightly below last year’s growth rate (an increase of 12.9% in 2016, compared to an increase of 14.7% in 2015). The amount of total banking deposits maintained in 2016 roughly the same growth rate of 2015 at 12.4% year-on-year. Despite the faster growth of total lending and total assets under management, the overall capitalization level remained unchanged at 15.0% as of November 30, 2016.

In Mexico, changes in banking regulation could have a significant potential impact on competition. In particular, the government proposed a Financial Reform Initiative in May 2013 that was approved in January 2014. The reform includes:

• Changes in the mandate of development banks (public banks) to foster the growth of the financial system. The reform allowed for a modern management of internal organization, use of capital, human resources and talent.

• Measures to promote competition in the financial sector to make financial services less expensive. The reform strengthened the powers of the financial ombudsman, the Condusef, to regulate the relationship between financial institutions and consumers, allowed it to issue public recommendations to financial institutions; created a bureau of financial institutions aimed at strengthening market discipline; and established a new arbitral system for conflict resolution, among others. The reform also made it easier for consumers to switch mortgages. Overall greater competition in this market has resulted in lower interest rates and better conditions for consumers. A new framework for the regulation of card payment systems was also introduced for the ultimate benefit of financial consumers.

• Additional incentives to boost lending. The reform also aimed to redress the shortcomings and difficulties of guarantee execution which eventually translated in higher prices and worse conditions for financial consumers in general. The reform amended judicial proceedings, safeguarded lenders rights and expedited execution of pledged assets (without the need of an execution proceeding or a court ruling on the matter). These changes may have contributed to the positive performance of credit in recent months. The introduction of specialized courts for financial matters, one of the reform’s most promising improvements and with greater potential to further expand credit, remains pending. Once in place, these courts should resolve matters in a more expedited and efficient way, allowing for example the quick execution of guarantees for the immediate benefit of lenders. These courts should help reduce overall judicial costs, strengthen market discipline and enable greater competition through cleaner prices.

• The improvement of prudential regulation to strengthen the financial and banking systems.

It is early to determine the definitive impact that the financial reform has had on the level of competition of the Mexican financial system. Credit has performed positively since the approval of the reform but this may also be the result of a relatively stable and positive overall macroeconomic performance. Further, both commercial and development bank credit had already engaged in a growth cycle well before the reform was unveiled as both credit portfolios have shown real annual growth from 2010 onwards. Although the new regulatory framework may have contributed to the recent success, the real impact of the reform should manifest in the medium and long term.

In addition, any changes in laws, regulations and policies pursued by the incoming U.S. Government may adversely affect the emerging markets in which the Group operates, particularly Mexico due to the trade and other ties between Mexico and the United States.

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G. Cybersecurity and Fraud Management

Digital transformation has become a strategic priority for the financial sector and in particular for BBVA. In this regard, it is vital to protect our trademark, our assets and the information of our customers from existent threats in the digital world.

To obtain this objective, we have a Computer Emergency Response Team (CERT) which is responsible for preventing, alerting and responding to cyber threats. We believe that the CERT can adapt quickly and innovate solutions to solve the challenges needed to digitally transform the BBVA Group, while keeping up with the frequent changes to cyber-crime technology.

With the objective of maintaining the best practices of the international financial sector, in 2016 a Technology and Cybersecurity Committee was created in the BBVA Group. This committee is composed of four Board members and is chaired by the Chief Executive Officer of BBVA.

During 2016, BBVA has consolidated the implementation of the NIST (National Institute of Standards and Technology) standard with the control and management framework of cyber security.

Lastly, BBVA has a strong commitment to the protection of its customers, and to this end we work closely with regulators and the bank industry in those countries in which the BBVA Group has a presence, with the goal that customers are always protected.

During 2016, BBVA made progress in the integrity management of all external and internal fraud prevention processes, including the establishment of a corporate fraud committee. The BBVA Group’s global anti-fraud program is focused on preventing and mitigating the impact of fraudulent activities.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

The BBVA Group is a customer-centric global financial services group founded in 1857. It has a solid leadership position in the Spanish market, it is the largest financial institution in Mexico in terms of assets, it has leading franchises in South America and the Sunbelt Region of the United States; moreover, it is also the leading shareholder in Garanti, Turkey’s biggest bank in terms of market capitalization. Its diversified business is focused on high-growth markets and it relies on technology as a key sustainable competitive advantage. Corporate responsibility is at the core of its business model. BBVA fosters financial education and inclusion, and supports scientific research and culture.

The BBVA Group operates in Spain through Banco Bilbao Vizcaya Argentaria, S.A., a private-law entity subject to the laws and regulations governing banking entities operating in Spain. It carries out its activity through branches and agencies across the country and abroad. In addition to the transactions it carries out directly, Banco Bilbao Vizcaya Argentaria, S.A. is the parent company of the BBVA Group, which includes a group of subsidiaries, joint ventures and associates performing a wide range of activities.

As of December 31, 2016, the BBVA Group had 134,792 employees, 70 million customers, 8,660 branches and 31,120 ATMs and was present in 35 countries. As of such date the BBVA Group was composed of 370 consolidated entities and 89 entities accounted for using the equity method.

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Critical Accounting Policies

The Consolidated Financial Statements as of and for the years ended December 31, 2016, 2015 and 2014 were prepared by the Bank’s directors in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004, and in compliance with IFRS-IASB, and by applying the basis of consolidation, accounting policies and measurement bases described in Note 2 to the Consolidated Financial Statements, so that they present fairly the Group’s total equity and financial position as of December 31, 2016, 2015 and 2014, and its results of operations and consolidated cash flows for the years ended December 31, 2016, 2015 and 2014. The Consolidated Financial Statements were prepared on the basis of the accounting records kept by the Bank and by each of the other Group companies and include the adjustments and reclassifications required to unify the accounting policies and measurement bases used by the Group. See Note 2.2 to the Consolidated Financial Statements.

In preparing the Consolidated Financial Statements estimates were made by the Group and the consolidated companies in order to quantify certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates relate mainly to the following:

• The impairment on certain financial assets.

• The assumptions used to quantify other provisions and for the actuarial calculation of the post-employment benefit liabilities and commitments.

• The useful life and impairment losses of tangible and intangible assets.

• The measurement of goodwill.

• The fair value of certain unlisted financial assets and liabilities.

• The recoverability of deferred tax assets.

• The exchange rate and the inflation rate of Venezuela.

Although these estimates were made on the basis of the best information available as of December 31, 2016, 2015 and 2014, respectively, on the events analyzed, events that take place in the future might make it necessary to revise these estimates (upwards or downwards) in coming years.

Note 2 to the Consolidated Financial Statements contains a summary of our significant accounting policies. We consider certain of these policies to be particularly important due to their effect on the financial reporting of our financial condition and because they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the Consolidated Financial Statements. The nature of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our Consolidated Financial Statements and the discussion below.

We have identified the accounting policies enumerated below as critical to the understanding of our results of operations, since the application of these policies requires significant management assumptions and estimates that could result in materially different amounts to be reported if the assumptions used or underlying circumstances were to change.

See Note 2.3 to the Consolidated Financial Statements for information on changes to IFRS or their interpretation that will become effective after the date of this Annual Report.

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Fair value of financial instruments

The fair value of an asset or a liability on a given date is taken to be the price that would be received upon the sale of an asset, or paid, upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The most objective and common reference for the fair value of an asset or a liability is the price that would be paid for it on an organized, transparent and deep market (“quoted price” or “market price”).

If there is no market price for a given asset or liability, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, by using mathematical measurement models sufficiently tried and trusted by the international financial community. Such estimates would take into consideration the specific features of the asset or liability to be measured and, in particular, the various types of risk associated with the asset or liability. However, the limitations inherent to the measurement models developed and the possible inaccuracies of the assumptions required by these models may signify that the fair value of an asset or liability thus estimated does not coincide exactly with the price for which the asset or liability could be purchased or sold on the date of its measurement.

See Notes 2.2.1 and 8 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies.

Derivatives and other future transactions

These instruments include outstanding foreign currency purchase and sale transactions, outstanding securities purchase and sale transactions, futures transactions relating to securities, exchange rates or interest rates, forward interest rate agreements, options relating to exchange rates, securities or interest rates and various types of financial swaps.

All derivatives are recognized on the balance sheet at fair value from the date of arrangement. If the fair value of a derivative is positive, it is recorded as an asset and if it is negative, it is recorded as a liability. Unless there is evidence to the contrary, it is understood that on the date of arrangement the fair value of the derivatives is equal to the transaction price. Changes in the fair value of derivatives after the date of arrangement are recognized with a balancing entry under the heading “Gains or Losses on Financial Assets and Liabilities” in the consolidated income statement.

Specifically, the fair value of the standard financial derivatives included in the held for trading portfolios is equal to their daily quoted price. If, under exceptional circumstances, their quoted price cannot be established on a given date, these derivatives are measured using methods similar to those used to measure over-the-counter (“OTC”) derivatives.

The fair value of OTC derivatives is equal to the sum of the future cash flows arising from the instruments discounted at the measurement date (“present value” or “theoretical value”). These derivatives are measured using methods recognized by the financial markets, including the net present value (“NPV”) method and option price calculation models.

Financial derivatives that have as their underlying equity instruments, whose fair value cannot be determined in a sufficiently objective manner and are settled by delivery of those instruments, are measured at cost.

Financial derivatives designated as hedging items are included in the heading of the balance sheet “Hedging derivatives”. These financial derivatives are valued at fair value.

See Note 2.2.1 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies with respect to these instruments.

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Goodwill in consolidation

Pursuant to IFRS 3, if the difference on the date of a business combination between the sum of the consideration transferred, the amount of all the non-controlling interests and the fair value of equity interest previously held in the acquired entity, on one hand, and the fair value of the assets acquired and liabilities assumed, on the other hand, is positive, it is recorded as goodwill on the asset side of the balance sheet. Goodwill represents the future economic benefits from assets that cannot be individually identified and separately recognized.

Goodwill is not amortized and is subject periodically to an impairment analysis. Any impaired goodwill is written off.

If the difference is negative, it is recognized directly in the income statement under the heading “Negative goodwill in business combinations”.

Goodwill is allocated to one or more cash-generating units, or CGUs, expected to benefit from the synergies arising from business combinations. The CGUs units represent the Group’s smallest identifiable business and/or geographical segments as managed internally by its directors within the Group.

The CGUs to which goodwill has been allocated are tested for impairment based on the carrying amount of the unit including the allocated goodwill. Such testing is performed at least annually and whenever there is an indication of impairment.

For the purpose of determining the impairment of a CGU to which a part or all of goodwill has been allocated, the carrying amount of that CGU, adjusted by the theoretical amount of the goodwill attributable to the non-controlling interest, shall be compared to its recoverable amount. The resulting difference shall be apportioned by reducing, firstly, the carrying amount of the goodwill allocated to that unit and, secondly, if there are still impairment losses remaining to be recognized, the carrying amount of the rest of the assets. This shall be done by allocating the remaining difference in proportion to the carrying amount of each of the assets in the CGU. In any case, impairment losses on goodwill can never be reversed.

See Notes 2.2.7 and 2.2.8 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies related to goodwill.

The results from each of these tests on the dates mentioned were as follows:

As of December 31, 2016, 2015 and 2014, no indicators of impairment had been identified in any of the main CGUs.

The Group’s most significant goodwill corresponds to the CGU in the United States. The calculation of the impairment loss used the cash flow projections estimated by the Group’s management, based on the latest budgets available for the next five years. As of December 31, 2016, the Group used a sustainable growth rate of 4.0% (the same rate was considered as of December 31, 2015 and 2014) to extrapolate the cash flows in perpetuity starting on the fifth year (2020), based on the real GDP growth rate of the United States and the income recurrence. The rate used to discount the cash flows is the cost of capital assigned to the CGU, 10.0% as of December 31, 2016 (9.8% and 10.0% as of December 31, 2015 and 2014, respectively), which consists of the free risk rate plus a risk premium.

As of December 31, 2016 if the discount rate had increased or decreased by 50 basis points, the recoverable amount would have decreased or increased by €1,106 million and €1,309 million respectively (€1,117 million and €1,329 million respectively as of December 31, 2015). If the growth rate had increased or decreased by 50 basis points, the recoverable amount would have increased or decreased by €521 million and €441 million respectively (€803 million and €675 million respectively as of December 31, 2015).

As of December 31, 2016 the recoverable amount of our main CGUs was substantially in excess of their carrying value and, as such, was not at risk of impairment.

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Insurance contracts

The methods and techniques used to calculate the mathematical reserves for insurance contracts mainly involve the valuation of the estimated future cash flows, discounted at the technical interest rate for each contract. Changes in insurance mathematical reserves may occur in the future as a consequence of changes in interest rates and other key assumptions. See Notes 2.2.9 and 23 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies and assumptions about our most significant insurance contracts.

Post-employment benefits and other long term commitments to employees

Pension and post-retirement benefit costs and credits are based on actuarial calculations. Inherent in these calculations are assumptions including discount rates, rate of salary increase and expected return on plan assets. Changes in pension and post-retirement costs may occur in the future as a consequence of changes in interest rates, expected return on assets or other assumptions. See Notes 2.2.12 and 25 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies about pension and post-retirement benefit costs and credits.

Impairment losses on financial assets

As we describe in Note 2.2.1 to the Consolidated Financial Statements, a loan is considered to be an impaired loan and, therefore, its carrying amount is adjusted to reflect the effect of its impairment when there is objective evidence that events have occurred which give rise to a negative impact on the future cash flows that were estimated at the time the transaction was arranged. The potential impairment of these assets is determined individually or collectively.

Impairment losses on financial assets collectively evaluated for impairment are calculated by using statistical procedures, and they are deemed equivalent to the portion of losses incurred on the date that the consolidated financial statements are prepared that has yet to be allocated to specific assets. The BBVA Group also estimates losses through statistical processes that apply historical data and other specific parameters that, although having been generated as of closing date for these consolidated financial statements, have arisen on an individual basis following the reporting date (“incurred but not reported losses”).

The incurred loss is calculated taking into account three key factors: exposure at default, probability of default and loss given default.

• Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty.

• Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The PD is associated with the rating/scoring of each counterparty/transaction. In addition, the PD calculation includes the loss identification period (‘LIP’) parameter, which is the period between the time at which the event that generates a given loss occurs and the time when the loss is identified at an individual level. The analysis of the LIPs is carried out on the basis of uniform risk portfolios.

• Loss given default (LGD) is the estimate of the loss arising in the event of default. It depends mainly on the characteristics of the counterparty, and the valuation of the guarantees or collateral associated with the asset. In order to calculate the LGD at each balance sheet date, the Group evaluates the whole amount expected to be obtained over the remaining life of the financial asset. The recoverable amount from executable secured collateral is estimated based on the property valuation, discounting the necessary adjustments to adequately account for the potential fall in value until its execution and sale, as well as execution costs, maintenance costs and sale costs. When a property right is contractually acquired at the end of the foreclosure process or when the assets of distressed borrowers are purchased, the asset is recognized in the financial statements (see Note 2.2.4 to the Consolidated Financial Statements).

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For the years ended December 31, 2016, 2015 and 2014, there was no material difference in the amount of incurred losses on loans and advances calculated in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB.

The estimates of the portfolio’s inherent risks and overall recovery vary with changes in the economy, individual industries, countries and individual borrowers’ or counterparties’ ability and willingness to repay their obligations. The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions.

Key judgments used in determining the allowance for loan losses include: (i) risk ratings for pools of commercial loans and advances; (ii) market and collateral values and discount rates for individually evaluated loans; (iii) product type classifications for consumer and commercial loans and advances; (iv) loss rates used for consumer and commercial loans and advances; (v) adjustments made to assess current events and conditions; (vi) considerations regarding domestic, global and individual countries economic uncertainty; and (vii) overall credit conditions.

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A. Operating Results

Factors Affecting the Comparability of our Results of Operations and Financial Condition

Trends in Exchange Rates

We are exposed to foreign exchange rate risk in that our reporting currency is the euro, whereas certain of our subsidiaries and investees keep their accounts in other currencies, principally Mexican pesos, U.S. dollars, Turkish liras, Argentine pesos, Chilean pesos, Colombian pesos, Venezuelan bolivar and Peruvian new soles. For example, if Latin American currencies, the U.S. dollar or the Turkish lira depreciate against the euro, when the results of operations of our subsidiaries in the countries using these currencies are included in our consolidated financial statements, the euro value of their results declines, even if, in local currency terms, their results of operations and financial condition have remained the same. By contrast, the appreciation of Latin American currencies, the U.S. dollar or the Turkish lira against the euro would have a positive impact on the results of operations of our subsidiaries in the countries using these currencies when their results of operations are included in our consolidated financial statements. Accordingly, changes in exchange rates may limit the ability of our results of operations, stated in euro, to fully show the performance in local currency terms of our subsidiaries.

The assets and liabilities of our subsidiaries which maintain their accounts in currencies other than the euro have been converted to the euro at the period-end exchange rates for inclusion in our Consolidated Financial Statements. Income statement items have been converted at the average exchange rates for the period. The following table sets forth the exchange rates of several Latin American currencies, the U.S. dollar and the Turkish lira against the euro, expressed in local currency per €1.00 as averages for 2016, 2015 and 2014 and as of December 31, 2016, 2015 and 2014 according to the ECB.

	Average Exchange Rates						Period-End Exchange Rates
	Year Ended December 31, 2016		Year Ended December 31, 2015		Year Ended December 31, 2014		As of December 31, 2016		As of December 31, 2015		As of December 31, 2014
Mexican peso		20.6637		17.6109		17.6582		21.7718		18.9147		17.8680
U.S.dollar		1.1069		1.1094		1.3283		1.0541		1.0887		1.2141
Argentine peso		16.3348		10.2526		10.7680		16.5846		14.1267		10.3830
Chilean peso		748.5030		725.6894		756.4297		703.2349		769.8229		736.9197
Colombian peso		3,378.3784		3,048.7805		2,652.5199		3,164.5570		3,424.6575		2,906.9767
Peruvian new sol		3.7333		3.5314		3.7672		3.5310		3.7092		3.6144
Venezuelan bolivar (*)		1,893.9394		469.4836		14.7785		1,893.9394		469.4836		14.5692
Turkish lira		3.3427		3.0246		2.9064		3.7072		3.1765		2.8320

(*) With respect to 2016 and 2015, an alternative exchange rate (see “Presentation of Financial Information—Venezuela”) has been used as reference.

During 2016, all of the above currencies depreciated against the euro in average terms, except for the U.S dollar. In particular, the Venezuelan bolivar depreciated significantly (see “Presentation of Financial Information—Venezuela”). With respect to period-end exchange rates, there was a period-on-period appreciation against the euro of the U.S. dollar, Chilean peso, Colombian peso and Peruvian new sol, and a period-on-period depreciation of the rest of currencies against euro, which was particularly significant for the Venezuelan bolivar. The overall effect of changes in exchange rates was negative for the period-on-period comparison of the Group’s income statement and was negative for the period-on-period comparison of the Group’s balance sheet.

During 2015, all of the above currencies appreciated against the euro in average terms, except for the Colombian peso, the Turkish lira and the Venezuelan bolivar, which, in the case of the Venezuelan bolivar, depreciated significantly. With respect to period-end exchange rates, there was a period-on-period depreciation of all of the above currencies against the euro, except for the U.S. dollar. The overall effect of changes in exchange rates was positive for the period-on-period comparison of the Group’s income statement and was negative for the period-on-period comparison of the Group’s balance sheet.

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When comparing two dates or periods in this Annual Report we have sometimes excluded the impact of changes in exchange rates by assuming constant exchange rates. In particular, with respect to income statement amounts, we have used the average exchange rate for the later period for both periods and, with respect to balance sheet amounts, we have used the closing exchange rate of such later period.

Consolidation of Garanti

On November 19, 2014, the Group signed agreements with Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk to acquire 62,538,000,000 additional shares of Garanti in the aggregate (equivalent to 14.89% of the capital of Garanti). Upon the closing of this acquisition in July 2015, we held 39.90% of Garanti’s share capital and started to consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity. On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “Item 4. Information on the Company—History and Development of the Company—Capital expenditures—2017.”

The acquisition completed in 2015 resulted in certain changes in our operating segments. In particular, since January 1, 2015, our former Eurasia segment has been recast into the following two segments: Turkey, which consists of our stake in Garanti (25.01% until July 27, 2015, 39.90% from July 27, 2015 to March 22, 2017 and 49.85% since March 22, 2017), and Rest of Eurasia, which includes the retail and wholesale businesses carried out in Europe and Asia, other than in Spain and Turkey.

In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect our current reporting structure. This revision did not affect the Group’s consolidated income statement. See Note 3 to our Consolidated Financial Statements for additional information.

Acquisition of Catalunya Banc

On April 24, 2015, once the necessary authorizations had been obtained and all the agreed conditions precedent had been fulfilled, BBVA announced the acquisition of 1,947,166,809 shares of Catalunya Banc, S.A. (approximately 98.4% of its share capital) for a price of approximately €1,165 million. Previously, on July 21, 2014, the Management Commission of the FROB had accepted BBVA’s bid in the competitive auction for the acquisition of Catalunya Banc. Such acquisition had an impact on the results of operations of the Banking Activity in Spain segment during 2015, affecting the comparability of the segment in 2015 with prior periods. As of December 31, 2016, Catalunya Banc had been fully merged into BBVA.

Operating Environment

Our results of operations are dependent, to a large extent, on the level of demand for our products and services (primarily loans and deposits but also intermediation of financial products such as sovereign or corporate debt) in the countries in which we operate. Demand for our products and services in those countries is affected by the overall performance of their respective economies regarding activity, employment, inflation and, particularly, interest rates. The demand for loans and saving products correlates positively with income, which correlates in turn with the Gross Domestic Product (GDP), the employment and corporate profits evolution. Regarding interest rates, they have a direct impact on banking results as the banking activity mainly relies on the generation of positive interest margins by paying lower interest than the interest received on investments. However, it should be noted that higher interest rates, everything equal, also reduce the demand for banking loans and increase the cost of funding of the banking business.

In spite of recent improvement, the world growth remains anchored at historical low levels, c. 3% in 2016 according to BBVA Research estimates, well below the 2015 estimation (3.5%) and its long-term average around 3.5%. This deceleration path is similar for the advanced economies GDP at the same time that emerging markets GDP growth keeps a 4% rate. World GDP growth perspectives are around 3.2% in 2017 according to BBVA Research forecasts.

Regarding the evolution of key economic areas for the Group, after growing by 3.2% in 2016, the Spanish economy continued to expand at an annualized rate slightly higher than 3.0% in the first quarter of 2017. According to BBVA Research’s current estimates, growth is expected to slow down towards an average of 2.7% in 2017. Some of the tailwinds of the Spanish economy, which had an expansionary effect on growth, are losing momentum: the fall of oil prices

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has stopped, the euro exchange rate depreciation has finished, price-competitiveness does not improve and interest rates do not register further decreases and the fiscal policy stance is less growth supportive than in the past. However, improvements in the credit market and the structural economic reforms implemented in Spain, including that of the labor market, are expected to remain anchors for economic growth in Spain.

The Mexican GDP grew by 2.0% in 2016 under a slowing rhythm that will likely intensify at least in the first part of 2017. The cooling-off of GDP in 2016 stemmed from the downward trend in some demand components of aggregate demand, both domestic and foreign, and especially in public investment and exports. Fiscal policy tightening and diminished demand from the United States were the main factors behind this evolution, BBVA Research forecasts GDP to grow around 1% in 2017. However Mexico’s outlook is plagued with uncertainty which mainly stems from the new U.S. administration’s economic policy, especially as regards trade and migration issues. Against this backdrop, sound fiscal policy and monetary policy oriented to price’s stability would be crucial for limiting the impact of uncertainties around the Mexican economy.

As regards Turkey, the preparation of Turkish’s National Accounts in accordance with the ESA 2010 methodology resulted in higher GDP levels for prior years. The annual GDP growth in the period 2011-15 was 7.1% on average compared to 4.4% according to previous estimation. 2016 annual GDP growth is estimated to have decreased to 2.3% weighted by the tightening of foreign funding conditions, the end of the fall in oil prices, and the uncertainty stemming from a challenging geopolitical and political background. However, GDP evolution is expected to benefit from a monetary policy which is focused on price stability and the possible implementation of a fiscal policy that supports demand.

South America GDP growth (based on the weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Mexico, Uruguay and Venezuela, according to their GDP size) was negative in 2016 (-1.4% according to BBVA Research estimates) due to the combined effect of lower commodity prices, lower demand from China, tougher global financial conditions and domestic problems in some economies such as Brazil and Argentina. While growth prospects for 2017 are supported by higher commodity prices, monetary easing and infrastructure investment in some cases, the outlook for this region is adversely affected by uncertainties regarding the impact of U.S. policy actions, the outcome of local elections and delays in planned investment.

The U.S. economy slowed down in 2016. GDP grew by 1.6% (2.6% in 2015) and continued to progress at dual speed, with strong consumption but moderate investment. Private consumption is expected to continue to increase at a similar pace, supported by employment growth, credit availability and more limited inflationary pressures, despite the important role that deleveraging is expected to play. With respect to investment, lower company earnings and the adjustment in the energy and mining sector are expected to continue to weigh on corporate decisions. Additionally, the limited increase of the Federal Reserve’s reference interest rates that started in December 2015 and continued in 2016 and 2017 is coherent with the subdued inflationary pressures. This gives room for maneuver to absorb the impact on the economy of higher real interest rates. All in all, we believe the U.S. economic outlook for 2017 and beyond rests on two key factors: whether the new administration’s ambitious pro-business agenda aimed at boosting investment and employment spurs consumption and investment and whether the administration can uphold the institutions that have given the U.S. economy a comparative advantage.

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BBVA Group Results of Operations for 2016 Compared with 2015

The table below shows the Group’s consolidated income statements for 2016 and 2015:

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Interest and similar income		27,708			24,783			11.8
Interest and similar expenses		(10,648	)		(8,761	)		21.5
Net interest income		17,059			16,022			6.5
Dividend income		467			415			12.5
Share of profit or loss of entities accounted for using the equity method		25			174			(85.6	)
Fee and commission income		6,804			6,340			7.3
Fee and commission expenses		(2,086	)		(1,729	)		20.6
Net gains (losses) on financial assets and liabilities		1,661			865			92.0
Exchange differences (net)		472			1,165			(59.5	)
Other operating income		1,272			1,315			(3.3	)
Other operating expenses		(2,128	)		(2,285	)		(6.9	)
Income on insurance and reinsurance contracts		3,652			3,678			(0.7	)
Expenses on insurance and reinsurance contracts		(2,545	)		(2,599	)		(2.1	)
Gross income		24,653			23,362			5.5
Administration costs		(11,366	)		(10,836	)		4.9
Personnel expenses		(6,722	)		(6,273	)		7.2
Other administrative expenses		(4,644	)		(4,563	)		1.8
Depreciation		(1,426	)		(1,272	)		12.1
Net margin before provisions		11,861			11,254			5.4
Provisions or (-) reversal of provisions		(1,186	)		(731	)		62.2
Impairment losses on financial assets (net)		(3,801	)		(4,272	)		(11.0	)
Impairment losses on other assets (net)		(521	)		(273	)		90.8
Gains (losses) on derecognition of non-financial assets and subsidiaries, net		70			(2,135	)		n.m.	(1)
Negative goodwill recognized in profit or loss		—			26			(100.0	)
Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations		(31	)		734			n.m.	(2)
Operating profit before tax		6,392			4,603			38.9
Tax expense or (-) income related to profit or loss from continuing operations		(1,699	)		(1,274	)		33.4
Profit from continuing operations		4,693			3,328			41.0
Profit from discontinued operations (net)		—			—			—
Profit		4,693			3,328			41.0
Profit attributable to parent company		3,475			2,642			31.5
Profit attributable to non-controlling interests		1,218			686			77.6

⁽¹⁾ Not meaningful.

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The changes in our consolidated income statements for 2016 and 2015 were as follows:

Net interest income

The following table summarizes the principal components of net interest income for 2016 compared with 2015.

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Interest and similar income		27,708			24,783			11.8
Interest and similar expenses		(10,648	)		(8,761	)		21.5
Net interest income		17,059			16,022			6.5

Net interest income for the year ended December 31, 2016 amounted to €17,059 million, a 6.5% increase compared with the €16,022 million recorded for the year ended December 31, 2015 mainly as a result of the following changes:

• in Turkey, net interest income increased as a result of the change in the consolidation method of Garanti in July 2015 and, to a lesser extent, increases in volumes and yields on loans and decreased cost of deposits, partially offset by a decline in the value of the Turkish lira;

• in the United States, net interest income increased mainly as a result of the impact of the appreciation of the U.S. dollar and, to a lesser extent, the impact of the growth in loans and advances to customers, as well as improving pricing of such loans and advances driven by higher yields in new loan production and the lower costs of deposits;

• in the Banking Activity in Spain, net interest income decreased compared to the previous year, mainly as a result of a decrease in loan volumes in an environment of low interest rates;

and was partially offset by the following changes:

• in Mexico, net interest income decreased mainly as a result of the impact of the depreciation of the Mexican peso, which more than offset the higher volumes in lending and fund gathering; and

• in South America, net interest income decreased mainly as a result of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso, which more than offset the increase in fees related to bills, receivables, checks and credit cards, particularly in Colombia and Argentina.

Dividend income

Dividend income for the year ended December 31, 2016 amounted to €467 million, a 12.5% increase compared with the €415 million recorded for the year ended December 31, 2015, mainly as a result of an increase in the collection of dividends from our investments in Telefónica S.A. and CNCB.

Share of profit or loss of entities accounted for using the equity method

Share of profit or loss of entities accounted for using the equity method for the year ended December 31, 2016 amounted to €25 million, an 85.6% decrease compared with the €174 million recorded for the year ended December 31, 2015. This decrease was mainly attributable to the fact that in 2015 the results of operations of Garanti were accounted for using the equity method for six months (through June 30, 2015), whereas we consolidated Garanti’s results throughout 2016 using the full integration method.

Fee and commission income

The breakdown of fee and commission income for 2016 and 2015 is as follows:

	Year Ended December 31,
	2016		2015		Change
	(In Millions of Euros)				(In %)
Bills receivables		52		94		(44.5	)
Current accounts		469		405		15.7
Credit and debit cards		2,679		2,336		14.7
Checks		207		239		(13.2	)
Transfers and others payment orders		578		474		21.9
Insurance product commissions		178		171		4.2
Commitment fees		237		172		37.5
Contingent risks		406		360		12.9
Asset Management		839		686		22.4
Securities fees		335		283		18.2
Custody securities		122		314		(61.1	)
Other		701		807		(13.1	)
Fee and commission income		6,804		6,340		7.3

100

Fee and commission income increased by 7.3% to €6,804 million for the year ended December 31, 2016 from €6,340 million for the year ended December 31, 2015 mainly as a result of the change in the consolidation method of Garanti and, to a lesser extent, increased collection and payment services income, particularly transfers, fees and commissions from credit cards in Mexico and South America.

Fee and commission expenses

The breakdown of fee and commission expenses for 2016 and 2015 is as follows:

	Year Ended December 31,
	2016		2015		Change
	(In Millions of Euros)				(In %)
Credit and debit cards		1,334		1,113		19.9
Transfers and others payment orders		102		92		10.9
Commissions for selling insurance		63		69		(8.7	)
Other fees and commissions		587		454		29.3
Fee and commission expenses		2,086		1,729		20.6

Fee and commission expenses increased by 20.6% to €2,086 million for the year ended December 31, 2016 from €1,729 million for the year ended December 31, 2015 mainly as a result of the change in the consolidation method of Garanti, the contribution of Catalunya Banc and, to a lesser extent, due to higher expenses assigned to insurance and credit and debit card commissions.

Net gains (losses) on financial assets and liabilities

Net gains on financial assets and liabilities increased by 92.0% to €1,661 million for the year ended December 31, 2016 from €865 million for the year ended December 31, 2015, mainly as a result of higher ALCO (Assets and Liabilities Committee) portfolio sales in Spain.

The table below provides a breakdown of net gains (losses) on financial assets and liabilities for the years ended December 31, 2016 and 2015. Beginning January 1, 2016, we have modified the sub-captions included in net gain (losses) on financial assets and liabilities. As a result, the breakdown shown below is not directly comparable with the sub-captions included in the 2015 Form 20-F under net gains (losses) on financial assets and liabilities:

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		1,375			1,055			30.3
Available-for-sale financial assets		1,271			980			29.7
Loans and receivables		95			76			23.9
Other		10			(1	)		n.m.	(1)
Gains or losses on financial assets and liabilities held for trading, net		248			(409	)		n.m.	(1)
Gains or losses on financial assets and liabilities designated at fair value through profit or loss, net		114			126			(9.2	)
Net gains (losses) on financial assets and liabilities		(76	)		93			n.m.	(1)
Net gains (losses) on financial assets and liabilities		1,661			865			92.0

⁽¹⁾ Not meaningful.

101

Exchange differences (net)

Exchanges differences (net) decreased from €1,165 million for the year ended December 31, 2015 to €472 million for the year ended December 31, 2016, due primarily to the evolution of foreign currencies and exchange rate management, including hedging arrangements.

Other operating income and expenses

Other operating income amounted to €1,272 million for the year ended December 31, 2016, a 3.3% decrease compared with €1,315 million for the year ended December 31, 2015, mainly due to the lower income from non-financial services, partially offset by higher dividends collected from CNCB.

Other operating expenses for the year ended December 31, 2016, amounted to €2,128 million, a 6.9% decrease compared with the €2,285 million recorded for the year ended December 31, 2015 due primarily to lower expenses from real estate companies.

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance for the year ended December 31, 2016 was €3,652 million, a 0.7% decrease compared with €3,678 million gain recorded for the year ended December 31, 2015.

Expenses on insurance and reinsurance contracts for the year ended December 31, 2016 were €2,545 million, a 2.1% decrease compared with the €2,599 million gain recorded for year ended December 31, 2015.

Administration costs

Administration costs for the year ended December 31, 2016 amounted to €11,366 million, a 4.9% increase compared with the €10,836 million recorded for the year ended December 31, 2015, mainly due to the change in the consolidation method of Garanti and the higher contribution of Catalunya Banc, partially offset by the effect of the depreciation of the currencies in Mexico and South America.

The table below provides a breakdown of personnel expenses for the years ended December 31, 2016 and 2015. Beginning January 1, 2016, we have modified the sub-captions included in administration costs. As a result, the breakdown shown below is not directly comparable with the sub-captions included in the 2015 Form 20-F under administration costs.

	Year Ended December 31,
	2016		2015		Change
	(In Millions of Euros)				(In %)
Wages and salaries		5,267		4,868		8.2
Social security costs		784		733		7.0
Defined contribution plan expense		87		84		3.6
Defined benefit plan expense		67		57		17.5
Other personnel expenses		516		531		(2.8	)
Personnel expenses		6,722		6,273		7.2

102

Wages and salary expenses increased 7.2% from €6,273 million for the year ended December 31, 2015 to €6,722 million for year ended December 31, 2016, mainly as a result of the change in the consolidation method of Garanti.

The table below provides a breakdown of other administrative expenses for 2016 and 2015:

	Year Ended December 31,
	2016		2015		Change
	(In Millions of Euros)				(In %)
Technology and systems		673		625		7.7
Communications		294		281		4.8
Advertising		398		387		2.9
Property, fixtures and materials		1,080		1,030		4.9
Of which:
Rent expenses		616		591		4.2
Taxes other than income tax		433		466		(7.1	)
Other expenses		1,766		1,775		(0.5	)
Other administrative expenses		4,644		4,563		1.8

Technology and systems expenses increased 7.7% from €625 million for the year ended December 31, 2015 to €673 million for the year ended December 31, 2016, mainly due to the change in the consolidation method of Garanti and higher spending on technology. Property, fixtures and materials expenses increased from €1,030 million for the year ended December 31, 2015 to €1,080 million mainly as a result of the change in the consolidation method of Garanti and the higher contribution of Catalunya Banc.

Depreciation

Depreciation for the year ended December 31, 2016 was €1,426 million, an 12.1% increase compared with the €1,272 million recorded for the year ended December 31, 2015 mainly as a result of the change in the consolidation method of Garanti, the acquisition of Catalunya Banc and, to a lesser extent, the amortization of software and hardware particularly in the United States affected by the mild appreciation of the U.S. dollar.

Provisions or (-) reversal of provisions

Provisions for the year ended December 31, 2016 totaled €1,186 million, a 62.2% increase compared with the €731 million recorded for the year ended December 31, 2015 mostly as a result of higher provisions related to the invalidity of clauses limiting of interest rates in certain mortgage loans with customers (the so-called “cláusulas suelo”) of €577 million (€404 million after tax).

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) for the year ended December 31, 2016 was a loss of €3,801 million, a 11.0% decrease compared with the €4,272 million loss recorded for the year ended December 31, 2015 mainly due to decreased impaired assets as a result of lower additions to non-performing assets in Spain, higher recovery of written-off assets of the Real Estate Activity in Spain segment and the impact of the depreciation of the majority of our operating currencies against the euro. These effects were partially offset by the change in the consolidation method of Garanti. The Group’s non-performing asset ratio was 4.9% as of December 31, 2016, compared with 5.4% as of December 31, 2015.

103

Impairment losses on other assets (net)

Impairment losses on other assets (net) for the year ended December 31, 2016 amounted to €521 million, a 90.8% increase compared with the €273 million recorded for the year ended December 31, 2015, due to impairments losses on real estate investment properties in Spain.

Gains (losses) on derecognition of non-financial assets and subsidiaries, net

Gains (losses) on derecognition of non-financial assets and subsidiaries, net for the year ended December 31, 2016 amounted to a gain of €70 million, compared with a loss of €2,135 million recognized for the year ended December 31, 2015. The loss recorded for the year ended December 31, 2015 was mainly the result of the fair value measurement of the stake we already held in Garanti at the time we acquired our additional 14.89% stake in Garanti, which we had to make as a result of the purchase of an additional stake in Garanti and the change in its consolidation method.

Negative goodwill recognized in profit or loss

There was no negative goodwill recognized in profit or loss for the year ended December 31, 2016. There was €26 million negative goodwill recognized in profit or loss for the year ended December 31, 2015 as a result of the acquisition of Catalunya Banc.

Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations for the year ended December 31, 2016, amounted to a loss of €31 million, compared with a gain of €734 million for the year ended December 31, 2015. The gain in 2015 related mainly to capital gains from the sale of the 6.34% stake in CNCB.

Operating profit before tax

As a result of the foregoing, operating profit before tax for the year ended December 31, 2016 was €6,392 million, a 38.9% increase from the €4,603 million recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations for the year ended December 31, 2016 was an expense of €1,699 million, compared with a €1,274 million expense recorded for the year ended December 31, 2015, as a result of higher operating profit before tax and a lower proportion of income with low or zero tax rates (primarily dividends and equity-accounted earnings).

Profit from continuing operations

As a result of the foregoing, profit from continuing operations for the year ended December 31, 2016 was €4,693 million, a 41.0% increase from the €3,328 million recorded for the year ended December 31, 2015.

Profit from discontinued operations (net)

There was no profit from discontinued operations for the year ended December 31, 2016, nor for the year ended December 31, 2015.

Profit

As a result of the foregoing, profit for the year ended December 31, 2016 was €4,693 million, a 41.0% increase from the €3,328 million recorded for the year ended December 31, 2015.

104

Profit attributable to parent company

Profit attributable to parent company for the year ended December 31, 2016 was €3,475 million, a 31.5% increase from the €2,642 million recorded for the year ended December 31, 2015.

Profit attributable to non-controlling interests

Profit attributable to non-controlling interests for the year ended December 31, 2016 was €1,218 million, a 77.6% increase compared with €686 million for the year ended December 31, 2015, mainly as a result of the change in the consolidation method of Garanti and stronger performance of our Peruvian and Argentinian operations where there are minority shareholders, partially offset by the depreciation of the Venezuelan bolivar.

BBVA Group Results of Operations for 2015 Compared with 2014

The table below shows the Group’s consolidated income statements for 2015 and 2014:

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Interest and similar income		24,783			22,838			8.5
Interest expense and similar charges		(8,761	)		(8,456	)		3.6
Net interest income		16,022			14,382			11.4
Dividend income		415			531			(21.8	)
Share of profit or loss of entities accounted for using the equity method		174			343			(49.3	)
Fee and commission income		6,340			5,530			14.6
Fee and commission expenses		(1,729	)		(1,356	)		27.5
Net gains (losses) on financial assets and liabilities		865			1,435			(39.7	)
Exchange differences (net)		1,165			699			66.7
Other operating income		1,315			959			37.1
Other operating expenses		(2,285	)		(2,705	)		(15.5	)
Income on insurance and reinsurance contracts		3,678			3,622			1.5
Expenses on insurance and reinsurance contracts		(2,599	)		(2,714	)		(4.2	)
Gross income		23,362			20,725			12.7
Administration costs		(10,836	)		(9,414	)		15.1
Personnel expenses		(6,273	)		(5,410	)		16.0
Other administrative expenses		(4,563	)		(4,004	)		14.0
Depreciation		(1,272	)		(1,145	)		11.1
Net margin before provisions		11,254			10,166			10.7
Provisions or (-) reversal of provisions		(731	)		(1,142	)		(36.0	)
Impairment losses on financial assets (net)		(4,272	)		(4,340	)		(1.6	)
Impairment losses on other assets (net)		(273	)		(297	)		(8.1	)
Gains (losses) on derecognition of non-financial assets and subsidiaries, net		(2,135	)		46			n.m.	(1)
Negative goodwill recognized in profit or loss		26			—			n.m.	(1)
Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations		734			(453	)		n.m.	(1)
Operating profit before tax		4,603			3,980			15.7
Tax expense or (-) income related to profit or loss from continuing operations		(1,274	)		(898	)		41.9
Profit from continuing operations		3,328			3,082			8.0
Profit from discontinued operations (net)		—			—			—
Profit		3,328			3,082			8.0
Profit attributable to parent company		2,642			2,618			0.9
Profit attributable to non-controlling interests		686			464			47.8

⁽¹⁾  Not meaningful.

105

The changes in our consolidated income statements for 2015 and 2014 were as follows:

Net interest income

The following table summarizes the principal components of net interest income for 2015 compared with 2014.

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Interest and similar income		24,783			22,838			8.5
Interest expense and similar charges		(8,761	)		(8,456	)		3.6
Net interest income		16,022			14,382			11.4

Net interest income for the year ended December 31, 2015 amounted to €16,022 million, an 11.4% increase compared with the €14,382 million recorded for the year ended December 31, 2014 mainly as a result of the following changes:

• in the Banking Activity in Spain, due to the impact of the acquisition of Catalunya Banc and, to a lesser extent, increased loans and advances to customers;

• in Turkey, as a result of the change in the consolidation method of Garanti in July 2015 and, to a lesser extent, due to increased volumes of loans resulting from new loan production in most portfolios especially mortgage loans, energy sector and service sector, partially offset by a negative exchange rate effect of the Turkish Liras;

• in Mexico, because of Mexican economic growth there has been increased activity, especially in loans and advances to customers; and

• in the United States, mainly as a result of the impact of the appreciation of the U.S. dollar, and to a lesser extent, the impact of the growth in loans and advances to customers, partially offset by a negative price effect as a result of the narrow spreads.

All these effects were partially offset by the decrease in the net interest income in South America, mainly due to the negative impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso.

Dividend income

Dividend income for the year ended December 31, 2015 amounted to €415 million, a 21.8% decrease compared with the €531 million recorded for the year ended December 31, 2014, mainly as a result of the absence of dividends received from CNCB during 2015 whereas in 2014 CNCB dividends amounted to €139 million.

Share of profit or loss of entities accounted for using the equity method

Share of profit or loss of entities accounted for using the equity method for the year ended December 31, 2015 amounted to €174 million, a 49.3% decrease compared with the €343 million recorded for the year ended December 31, 2014. This decrease was mainly attributable to the fact that in 2015 the results of operations of Garanti were accounted for using the equity method for six months (through June 30, 2015), whereas they were accounted under such method for all of 2014. As explained in further detail in “Presentation of Financial Information—Retrospective Revisions—Changes in Operating Segments”, following the acquisition of an additional 14.89% stake in Garanti in July 2015, we fully consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity.

106

Fee and commission income

The breakdown of fee and commission income for 2015 and 2014 is as follows:

	Year Ended December 31,
	2015		2014		Change
	(In Millions of Euros)				(In %)
Bills receivables		94		77		21.2
Current accounts		405		321		26.2
Credit and debit cards		2,336		2,061		13.3
Checks		239		219		9.1
Transfers and others payment orders		474		329		44.1
Insurance product commissions		171		79		115.0
Commitment fees		172		184		(6.3	)
Contingent risks		360		297		21.0
Asset Management		686		594		15.4
Securities fees		283		274		3.6
Custody securities		314		308		1.9
Other		807		787		2.6
Fee and commission income		6,340		5,530		14.6

Fee and commission income increased by 14.6% to €6,340 million for the year ended December 31, 2015 from €5,530 million for the year ended December 31, 2014 mainly as a result of the change in the consolidation method of Garanti, the acquisition of Catalunya Banc and, to a lesser extent, due to higher revenues from credit and debit cards and from transfers and other payment orders in Mexico and the positive impact of the appreciation of the U.S. dollar. These effects were partially offset by the impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso and the Turkish lira.

Fee and commission expenses

The breakdown of fee and commission expenses for 2015 and 2014 is as follows:

	Year Ended December 31,
	2015		2014		Change
	(In Millions of Euros)				(In %)
Credit and debit cards		1,113		881		26.4
Transfers and others payment orders		92		63		47.0
Commissions for selling insurance		69		53		29.9
Other fees and commissions		454		360		26.2
Fee and commission expenses		1,729		1,356		27.5

Fee and commission expenses increased by 27.5% to €1,729 million for the year ended December 31, 2015 from €1,356 million for the year ended December 31, 2014 mainly as a result of the change in the consolidation method of Garanti, the acquisition of Catalunya Banc and, to a lesser extent, due to higher expenses assigned to credit and debit cards in Mexico and the impact of the appreciation of the U.S. dollar. These effects were partially offset by the impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso and the Turkish lira.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains on financial assets and liabilities and exchange differences (net) decreased by 39.7% to €865 million for the year ended December 31, 2015 from €1,435 million for the year ended December 31, 2014. During 2015 we generated losses on financial assets held for trading mainly due to derivative transactions of Garanti, and to a lesser extent, losses generated in the South America operating segment, affected by volatility in the wholesale financial markets. Additionally, gains on available-for-sale financial assets decreased by 30.0% to €980 million for the year end December 31, 2015 from €1,400 million for the year ended December 31, 2014, mainly as a result of a decrease in gains from debt securities and lower ALCO portfolio sales in Spain.

107

The table below provides a breakdown of net gains (losses) on financial assets and liabilities for 2015 and 2014:

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		1,055			1,439			(26.6	)
Available-for-sale financial assets		980			1,400			(30.0	)
Loans and receivables		76			31			143.6
Other		(1	)		7			n.m.	(1)
Gains or losses on financial assets and liabilities held for trading, net		(409	)		11			n.m.	(1)
Gains or losses on financial assets and liabilities designated at fair value through profit or loss, net		126			32			286.2
Net gains (losses) on financial assets and liabilities		93			(47	)		n.m.	(1)
Net gains (losses) on financial assets and liabilities		865			1,435			(39.7	)

(1) Not meaningful.

Exchange differences (net) increased from €699 million for the year ended December 31, 2014 to €1,165 million for the year ended December 31, 2015, due primarily to the evolution of foreign currencies and exchange rate management, including hedging arrangements.

Other operating income and expenses

Other operating income amounted to €1,315 million for the year ended December 31, 2015 a 37.1% increase compared with €959 million for the year ended December 31, 2014, mainly due to higher capital gains from sales of real estate assets in Spain.

Other operating expenses for the year ended December 31, 2015, amounted to €2,285 million, a 15.5% decrease compared with the €2,705 million recorded for the year ended December 31, 2014 mainly as a result of the adjustment for hyperinflation in Venezuela and the impact of the depreciation of the Venezuelan bolivar.

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance for the year ended December 31, 2015 was €3,678 million, a 1.5% increase compared with €3,622 million gain recorded for the year ended December 31, 2014, mainly due to increased income on insurance and reinsurance contracts in Mexico and, to a lesser extent, in Argentina, Chile and Colombia.

Expenses on insurance and reinsurance contracts for the year ended December 31, 2015 were €2,599 million, a 4.2% decrease compared with the €2,714 million gain recorded for year ended December 31, 2014.

Administration costs

Administration costs for the year ended December 31, 2015 amounted to €10,836 million, a 15.1% increase compared with the €9,414 million recorded for the year ended December 31, 2014 mainly as a result of the change in the consolidation method of Garanti, the acquisition of Catalunya Banc and, to a lesser extent, the impact of the appreciation of the U.S. dollar.

108

The table below provides a breakdown of personnel expenses for 2015 and 2014.

	Year Ended December 31,
	2015		2014		Change
	(In Millions of Euros)				(In %)
Wages and salaries		4,868		4,108		18.5
Social security costs		733		683		7.3
Transfers to internal pension provisions		84		63		33.3
Contributions to external pension funds		57		58		(1.7	)
Other personnel expenses		531		498		6.6
Personnel expenses		6,273		5,410		16.0

The table below provides a breakdown of other administrative expenses for 2015 and 2014:

	Year Ended December 31,
	2015		2014		Change
	(In Millions of Euros)				(In %)
Technology and systems		625		585		6.8
Communications		281		271		3.6
Advertising		387		333		16.0
Property, fixtures and materials		1,030		916		12.5
Of which:
Rent expenses		591		461		28.3
Taxes other than income tax		466		418		11.3
Other expenses		1,775		1,480		19.9
Other administrative expenses		4,563		4,004		14.0

Depreciation

Depreciation for the year ended December 31, 2015 was €1,272 million, an 11.1% increase compared with the €1,145 million recorded for the year ended December 31, 2014 mainly as a result of the change in the consolidation method of Garanti, the acquisition of Catalunya Banc and, to a lesser extent, the amortization of software and hardware particularly in the United States affected by the appreciation of the U.S. dollar.

Provisions or (-) reversal of provisions

Provisions for the year ended December 31, 2015 totaled €731 million, a 36.0% decrease compared with the €1,142 million recorded for the year ended December 31, 2014 mainly as a result of lower provisions in the Real Estate Activity in Spain segment due to a decrease in foreclosed assets write-downs and lower foreclosed additions. Additionally there was a decrease in the costs related to early retirements and contributions to pension funds, particularly in Spain and, to a lesser extent, in Argentina, and there were lower legal contingencies in Chile.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) for the year ended December 31, 2015 was a loss of €4,272 million, a 1.6% decrease compared with the €4,340 million loss recorded for the year ended December 31, 2014 mainly due to decreased impaired assets as a result of lower additions to non-performing assets in Spain, higher recovery of written-off assets of the Real Estate Activity in Spain segment and the impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso and the Turkish lira. These effects were partially offset by the change in the consolidation method of Garanti and increased losses in Mexico (in line with the growth in the loan portfolio) and in the United States. The Group’s non-performing asset ratio was 5.4% as of December 31, 2015, compared with 5.8% as of December 31, 2014.

109

Impairment losses on other assets (net)

Impairment losses on other assets (net) for the year ended December 31, 2015 amounted to €273 million, an 8.1% decrease compared with the €297 million recorded for the year ended December 31, 2014, due to lower impairments losses on real estate investment properties in Spain.

Gains (losses) on derecognition of non-financial assets and subsidiaries, net

Gains (losses) on derecognition of non-financial assets and subsidiaries, net for the year ended December 31, 2015 amounted to a loss of €2,135 million, compared with a gain of €46 million recognized for the year ended December 31, 2014. This loss was mainly the result of the fair value measurement of the stake we already held in Garanti at the time we acquired our additional 14.89% stake in Garanti, which we had to make as a result of the purchase of an additional stake in Garanti and the change in its consolidation method.

Negative goodwill recognized in profit or loss

There was €26 million negative goodwill recognized in profit or loss for the year ended December 31, 2015 as a result of the acquisition of Catalunya Banc. There was no negative goodwill recognized in profit or loss for the year ended December 31, 2014.

Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations for the year ended December 31, 2015 amounted to a gain of €734 million, compared with a loss of €453 million for the year ended December 31, 2014. The gain in 2015 related mainly to capital gains from the sale of the 6.34% stake in CNCB. The loss in 2014 related mainly to the high provisions made in connection with foreclosed real estate assets in Spain.

Operating profit before tax

As a result of the foregoing, operating profit before tax for the year ended December 31, 2015 was €4,603 million, a 15.7% increase from the €3,980 million recorded for the year ended December 31, 2014.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations for the year ended December 31, 2015 was an expense of €1,274 million, compared with a €898 million expense recorded for the year ended December 31, 2014, as a result of higher profit and a lower proportion of income with low or zero tax rates (primarily dividends and equity-accounted earnings).

Profit from continuing operations

As a result of the foregoing, profit from continuing operations for the year ended December 31, 2015 was €3,328 million, an 8.0% increase from the €3,082 million recorded for the year ended December 31, 2014.

Profit from discontinued operations (net)

There was no profit from discontinued operations for the year ended December 31, 2015, nor for the year ended December 31, 2014.

Profit

As a result of the foregoing, profit for the year ended December 31, 2015 was €3,328 million, an 8.0% increase from the €3,082 million recorded for the year ended December 31, 2014.

110

Profit attributable to parent company

Profit attributable to parent company for the year ended December 31, 2015 was €2,642 million, a 0.9% increase from the €2,618 million recorded for the year ended December 31, 2014.

Profit attributable to non-controlling interests

Profit attributable to non-controlling interests for the year ended December 31, 2015 was €686 million, a 47.8% increase compared with the €464 million registered for the year ended December 31, 2014, mainly as a result of the change in the consolidation method of Garanti and stronger performance of our Peruvian and Argentinian operations where there are minority shareholders, partially offset by the depreciation of the Venezuelan bolivar.

111

Results of Operations by Operating Segment

The information contained in this section is presented under management criteria.

The tables set forth below reconcile the income statement of our operating segments presented in this section to the consolidated income statement of the Group. The “Adjustments” column reflects the differences between the Group income statement and the income statement calculated in accordance with management operating segment reporting criteria, which are the following:

• Some figures in 2014 differ from the ones presented in our 2014 Form 20-F due to the reclassification of several operating expenses related to technology from our Corporate Center to our Banking Activity in Spain segment. See “Presentation of Financial Information”.

• The treatment of Garanti: From July 2015 to March 2017, we held 39.90% of Garanti’s share capital and we fully consolidated Garanti’s results in our consolidated financial statements. Information for 2014 and, with respect to 2015, information from January 1 through June 30 has been calculated and is presented under management criteria according to which the assets, liabilities and income statement of Garanti are included in every line item of the balance sheet and the income statement based on our 25.01% interest in Garanti until July 2015. For purposes of the Group financial statements the participation in Garanti was accounted under “Share of profit or loss of entities accounted for using the equity method” through June 30, 2015.

• The creation of a line in the income statement called “Profit from corporate operations” which is in place of “Profit from discontinued operations” in the Group financial statements and which includes in 2015 the gains from the sale of our 6.34% participation in CNCB during 2015 and the impact of our acquisition of a 14.89% stake in Garanti in 2015 (which required us to (i) measure at fair value our prior 25.01% stake in Garanti, which was then classified as a joint venture accounted by the using of the equity method, and (ii) fully consolidate Garanti in the Consolidated Financial Statements of the BBVA Group).

112

	For the Year Ended December 31, 2016
	Banking Activity in Spain			Real Estate Activity in Spain			Turkey			Rest of Eurasia			Mexico			South America			United States			Corporate Center			Total			Adjustments		Group Income
	(In Millions of Euros)
Net interest income		3,883			60			3,404			166			5,126			2,930			1,953			(461	)		17,059			—		17,059
Net fees and commissions		1,500			6			731			194			1,149			634			638			(133	)		4,718			—		4,718
Net gains (losses) on financial assets and liabilities and exchange differences (net)		787			(3	)		77			87			222			464			142			356			2,133			—		2,133
Other operating income and expenses (net) (1)		275			(68	)		46			45			270			25			(27	)		178			744			—		744
Gross income		6,445			(6	)		4,257			491			6,766			4,054			2,706			(60	)		24,653			—		24,653
Administration costs		(3,280	)		(96	)		(1,524	)		(330	)		(2,149	)		(1,793	)		(1,652	)		(541	)		(11,366	)		—		(11,366	)
Depreciation		(319	)		(27	)		(214	)		(12	)		(247	)		(100	)		(190	)		(315	)		(1,426	)		—		(1,426	)
Net margin before provisions		2,846			(130	)		2,519			149			4,371			2,160			863			(916	)		11,862			—		11,862
Impairment losses on financial assets (net)		(763	)		(138	)		(520	)		30			(1,626	)		(526	)		(221	)		(37	)		(3,801	)		—		(3,801	)
Provisions or (-) reversal of provisions		(805	)		(475	)		(93	)		23			(67	)		(82	)		(30	)		(140	)		(1,668	)		—		(1,668	)
Operating profit/ (loss) before tax		1,278			(743	)		1,906			203			2,678			1,552			612			(1,094	)		6,392			—		6,392
Tax expense or (-) income related to profit or loss from continuing operations		(363	)		148			(390	)		(52	)		(697	)		(487	)		(153	)		296			(1,699	)		—		(1,699	)
Profit from continuing operations		915			(595	)		1,515			151			1,981			1,065			459			(798	)		4,693			—		4,693
Profit from discontinued operations /Profit from corporate operations (net) (2)		—			—			—			—			—			—			—			—			—			—		—
Profit		915			(595	)		1,515			151			1,981			1,065			459			(798	)		4,693			—		4,693
Profit attributable to non-controlling interests		(3	)		—			(917	)		—			(1	)		(294	)		—			(3	)		(1,218	)		—		(1,218	)
Profit attributable to parent company		912			(595	)		599			151			1,980			771			459			(801	)		3,475			—		3,475

⁽¹⁾  Includes share of profit or loss of entities accounted for using the equity method.

⁽²⁾  For Group income (derived from the Group income statement) this line represents “Profit from discontinued operations” and for operating segments (presented in accordance with management criteria) it represents “Profit from corporate operations”.

113

	For the Year Ended December 31, 2015
	Banking Activity in Spain			Real Estate Activity in Spain			Turkey			Rest of Eurasia			Mexico			South America			United States			Corporate Center			Total			Adjustments			Group Income
	(In Millions of Euros)
Net interest income		4,001			71			2,194			183			5,387			3,202			1,811			(424	)		16,426			(404	)		16,022
Net fees and commissions		1,605			2			471			170			1,223			718			616			(100	)		4,705			(94	)		4,611
Net gains (losses) on financial assets and liabilities and exchange differences (net)		1,013			4			(273	)		125			198			595			186			161			2,009			21			2,030
Other operating income and expenses (net) (1)		185			(105	)		42			(6	)		273			(38	)		18			172			540			159			699
Gross income		6,804			(28	)		2,434			473			7,081			4,477			2,631			(192	)		23,680			(318	)		23,362
Administration costs		(3,078	)		(101	)		(1,043	)		(337	)		(2,403	)		(1,875	)		(1,602	)		(589	)		(11,027	)		191			(10,836	)
Depreciation		(368	)		(25	)		(118	)		(15	)		(219	)		(104	)		(204	)		(237	)		(1,290	)		18			(1,272	)
Net margin before provisions		3,358			(154	)		1,273			121			4,459			2,498			825			(1,017	)		11,363			(109	)		11,254
Impairment losses on financial assets (net)		(1,332	)		(179	)		(422	)		(4	)		(1,633	)		(614	)		(142	)		(13	)		(4,339	)		67			(4,272	)
Provisions or (-) reversal of provisions		(478	)		(383	)		2			(6	)		(53	)		(71	)		3			(157	)		(1,144	)		1,261			(2405	)
Operating profit/ (loss) before tax		1,548			(716	)		853			111			2,772			1,814			685			(1,187	)		5,879			(1,276	)		4,603
Tax expense or (-) income related to profit or loss from continuing operations		(456	)		221			(166	)		(35	)		(678	)		(565	)		(168	)		407			(1,441	)		167			(1,274	)
Profit from continuing operations		1,092			(495	)		687			75			2,094			1,248			517			(781	)		4,438			(1,109	)		3,328
Profit from discontinued operations /Profit from corporate operations (net) (2)		—			—			—			—			—			—			—			(1,109	)		(1,109	)		1,109			—
Profit		1,092			(495	)		687			75			2,094			1,248			517			(1,890	)		3,328			—			3,328
Profit attributable to non-controlling interests		(6	)		(1	)		(316	)		—			(1	)		(343	)		—			(19	)		(686	)		—			686
Profit attributable to parent company		1,085			(496	)		371			75			2,094			905			517			(1,910	)		2,642			—			2,642

⁽¹⁾  Includes share of profit or loss of entities accounted for using the equity method.

⁽²⁾  For Group income (derived from the Group income statement) this line represents “Profit from discontinued operations” and for operating segments (presented in accordance with management criteria) it represents “Profit from corporate operations”.

114

	For the Year Ended December 31, 2014
	Banking Activity in Spain (3)			Real Estate Activity in Spain			Turkey			Rest of Eurasia			Mexico			South America			United States			Corporate Center (3)			Total			Adjustments			Group Income
	(In Millions of Euros)
Net interest income		3,830			(34	)		735			189			4,906			4,699			1,443			(651	)		15,116			(734	)		14,382
Net fees and commissions		1,453			5			191			187			1,166			901			553			(91	)		4,365			(191	)		4,174
Net gains (losses) on financial assets and liabilities and exchange differences (net)		1,149			(2	)		1			150			195			482			145			14			2,135			(1	)		2,134
Other operating income and expenses (net) (1)		189			(180	)		18			209			246			(890	)		(4	)		153			(260	)		295			35
Gross income		6,621			(211	)		944			736			6,513			5,191			2,137			(575	)		21,356			(631	)		20,725
Administration costs		(2,735	)		(123	)		(359	)		(331	)		(2,226	)		(2,137	)		(1,318	)		(541	)		(9,771	)		357			(9,414	)
Depreciation		(301	)		(23	)		(35	)		(12	)		(187	)		(179	)		(179	)		(264	)		(1,180	)		35			(1,145	)
Net margin before provisions		3,585			(357	)		550			393			4,100			2,875			640			(1,380	)		10,405			(239	)		10,166
Impairment losses on financial assets (net)		(1,690	)		(297	)		(146	)		(56	)		(1,517	)		(706	)		(68	)		(4	)		(4,486	)		146			(4,340	)
Provisions or (-) reversal of provisions		(623	)		(621	)		(11	)		(16	)		(75	)		(219	)		(10	)		(282	)		(1,857	)		11			(1,846	)
Operating profit/ (loss) before tax		1,272			(1,275	)		392			320			2,508			1,951			561			(1,666	)		4,063			(83	)		3,980
Tax expense or (-) income related to profit or loss from continuing operations		(374	)		386			(82	)		(65	)		(607	)		(490	)		(133	)		384			(981	)		83			(898	)
Profit from continuing operations		898			(889	)		310			255			1,900			1,461			428			(1,282	)		3,082			—			3,082
Profit from discontinued operations /Profit from corporate operations (net) (2)		—			—			—			—			—			—			—			—			—			—			—
Profit		898			(889	)		310			255			1,900			1,461			428			(1,282	)		3,082			—			3,082
Profit attributable to non-controlling interests		(4	)		—			—			—			2			(460	)		—			(3	)		(464	)		—			(464	)
Profit attributable to parent company		894			(889	)		310			255			1,903			1,001			428			(1,285	)		2,618			—			2,618

⁽¹⁾  Includes share of profit or loss of entities accounted for using the equity method.

⁽²⁾  For Group income (derived from the Group income statement) this line represents “Profit from discontinued operations” and for operating segments (presented in accordance with management criteria) it represents “Profit from corporate operations”.

⁽³⁾  In the fourth quarter of 2015, certain operating expenses related to technology were reclassified from the Corporate Center to the Banking Activity in Spain segment. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015. In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect the reclassification of these expenses.

115

Results of Operations by Operating Segment for 2016 Compared with 2015

BANKING ACTIVITY IN SPAIN

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Net interest income		3,883			4,001			(2.9	)
Net fees and commissions		1,500			1,605			(6.5	)
Net gains (losses) on financial assets and liabilities and exchange differences (net)		787			1,013			(22.3	)
Other operating income and expenses (net)		(124	)		(167	)		(25.5	)
Income and expenses (net) on insurance and reinsurance contracts		400			352			13.5
Gross income		6,445			6,804			(5.3	)
Administration costs		(3,280	)		(3,078	)		6.6
Depreciation		(319	)		(368	)		(13.3	)
Net margin before provisions		2,846			3,358			(15.2	)
Impairment losses on financial assets (net)		(763	)		(1,332	)		(42.7	)
Provisions or (-) reversal of provisions		(805	)		(478	)		68.6
Operating profit/(loss) before tax		1,278			1,548			(17.5	)
Tax expense or (-) income related to profit or loss from continuing operations		(363	)		(456	)		(20.4	)
Profit from continuing operations		915			1,092			(16.2	)
Profit from corporate operations (net)		—			—			—
Profit		915			1,092			(16.2	)
Profit attributable to non-controlling interests		(3	)		(6	)		(52.9	)
Profit attributable to parent company		912			1,085			(16.0	)

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €3,883 million, a 2.9% decrease compared with the €4,001 million recorded for the year ended December 31, 2015, mainly as a result of a decrease in loan volumes in an environment of low interest rates, where lower yields on loans were partially offset by cheaper funding.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €1,500 million, a 6.5% decrease compared with the €1,605 million recorded for the year ended December 31, 2015, mainly due to lower contribution from fees and commissions arising from securities services, including investment banking.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2016 was a gain of €787 million, a 22.3% decrease compared with the €1,013 million gain recorded for the year ended December 31, 2015, mainly as a result of lower ALCO portfolio sales. In addition, the sale of our stake in VISA Europe Ltd. to Visa Inc. in November 2015, which generated a €138 million gain in such year, contributed positively to our net gains (losses) on financial assets and liabilities and exchange differences (net) in such year.

116

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2016 was an expense of €124 million, a 25.5% decrease compared with the €167 million expense recorded for the year ended December 31, 2015, mainly as a result of a reduced annual contribution to the Single Resolution Fund.

Income and expenses on insurance and reinsurance contracts (net)

Income and expenses on insurance and reinsurance contracts (net) for the year ended December 31, 2016 was a net income of €400 million, a 13.5% increase compared with €352 million net income recorded for the year ended December 31, 2015, mainly due to the integration of Catalunya Banc and a higher amount of net premiums.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 was an expense of €3,280 million, 6.6% higher compared with the €3,078 million in expenses recorded for the year ended December 31, 2015, substantially all of which was a result of the acquisition of Catalunya Banc and the related subsequent integration costs.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2016 was a loss of €763 million, a 42.7% decrease compared with the €1,332 million loss recorded for the year ended December 31, 2015, mainly due to the continued improvement of credit quality in Spain. This operating segment’s non-performing asset ratio decreased to 5.8% as of December 31, 2016 from 6.6% as of December 31, 2015.

Provisions or (-) reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €805 million, 68.6% higher than the €478 million provisions recorded for the year ended December 31, 2015, and were mainly attributable to higher provisions related to the invalidity of clauses limiting interest rates in certain mortgage loans with customers (the so-called “cláusulas suelo”) of €577 million (€404 million after tax).

Operating profit/(loss) before tax

As a result of the foregoing, operating profit/(loss) before tax of this operating segment for the year ended December 31, 2016 amounted to €1,278 million of operating profit, a 17.5% decrease compared with the €1,548 million of operating profit recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2016 was an expense of €363 million, a 22.6% decrease compared with the €456 million expense recorded for the year ended December 31, 2015, mainly as a result of the 17.5% decrease in operating profit before tax. Such income tax was levied at a 30% tax rate.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €912 million, a 21.9% decrease compared with the €1,085 million recorded for the year ended December 31, 2015.

117

REAL ESTATE ACTIVITY IN SPAIN

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Net interest income		60			71			(16.2	)
Net fees and commissions		6			2			138.9
Net gains (losses) on financial assets and liabilities and exchange differences (net)		(3	)		4			n.m	(1)
Other operating income and expenses (net)		(68	)		(105	)		(35.0	)
Gross income		(6	)		(28	)		n.m	(1)
Administration costs		(96	)		(101	)		(4.9	)
Depreciation		(27	)		(25	)		11.2
Net margin before provisions		(130	)		(154	)		(15.2	)
Impairment losses on financial assets (net)		(138	)		(179	)		(23.1	)
Provisions or (-) reversal of provisions		(475	)		(383	)		23.9
Operating profit/(loss) before tax		(743	)		(716	)		3.8
Tax expense or (-) income related to profit or loss from continuing operations		148			221			(33.2	)
Profit from continuing operations		(595	)		(495	)		20.3
Profit from corporate operations (net)		—			—			—
Profit		(595	)		(495	)		20.3
Profit attributable to non-controlling interests		—			(1	)		n.m	(1)
Profit attributable to parent company		(595	)		(496	)		20.1

(1) Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to net interest income of €60 million, a 16.2% decrease compared with the net interest income of €71 million recorded for the year ended December 31, 2015.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €6 million, compared with the €2 million recorded for the year ended December 31, 2015.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2016 was a loss of €3 million, compared with the €4 million gain recorded for the year ended December 31, 2015.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2016 was an operating expense of €68 million, a 35.0% decrease compared with the €105 million expense recorded for the year ended December 31, 2015, mainly as a result of lower impairment related to the Bank’s participation in Metrovacesa S.A.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 was an expense of €96 million, 4.9% lower compared with the €101 million expense recorded for the year ended December 31, 2015, mainly as a result of a 16.5% decrease in other administrative expenses.

118

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2016 was €138 million, a 23.1% decrease compared with the €179 million recorded for the year ended December 31, 2015, mainly as a result of higher recovery of written-off assets as well as lower losses from real estate asset collateral.

Provisions or (-) reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €475 million, 23.9% higher than the €383 million expense recorded for the year ended December 31, 2015, as a result of higher impairments mainly due to the reallocation of certain loans from the Banking Activity in Spain segment to the Real Estate Activity in Spain segment relating to foreclosed assets, which resulted in higher loan loss provisions. The purpose of this reallocation was to better reflect the risk profile of the loan portfolios of each segment. With respect to the foreclosed assets of this segment, we updated their appraisal value to reflect higher haircuts on the less liquid assets, in respect of which we have limited market references and a wide price valuation range. The portfolios which were most impacted by this update were our land portfolios.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit (loss) before tax of this operating segment for the year ended December 31, 2016 was a loss of €743 million, a 3.8% increase compared with the €716 million loss recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2016 amounted to income of €148 million, a 33.2% decrease compared with the €221 million of income recorded for the year ended December 31, 2015, mainly as a result of the reversal of certain deductions that were applied in prior years in connection with impairments in participations.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 was a loss of €595 million, compared with the €496 million loss recorded for the year ended December 31, 2015.

TURKEY

In accordance with IFRS 8, information for the Turkey operating segment is presented under management criteria, pursuant to which Garanti’s information has been proportionally consolidated based on our 25.01% interest in Garanti during the six-month period ended June 30, 2015. From July 2015 to March 2017, we held 39.90% of Garanti’s share capital and we have fully consolidated Garanti’s results in our consolidated financial statements. On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “Item 4. Information on the Company—History and Development of the Company—Capital expenditures—2017”.

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Net interest income		3,404			2,194			55.1
Net fees and commissions		731			471			55.2
Net gains (losses) on financial assets and liabilities and exchange differences (net)		77			(273	)		n.m	(1)
Other operating income and expenses (net)		(18	)		2			n.m	(1)
Income and expenses (net) on insurance and reinsurance contracts		64			40			62.0
Gross income		4,257			2,434			74.9
Administration costs		(1,524	)		(1,043	)		46.2
Depreciation		(214	)		(118	)		81.8
Net margin before provisions		2,519			1,273			97.8
Impairment losses on financial assets (net)		(520	)		(422	)		23.2
Provisions or (-) reversal of provisions		(93	)		2			n.m	(1)
Operating profit/(loss) before tax		1,906			853			123.5
Tax expense or (-) income related to profit or loss from continuing operations		(390	)		(166	)		135.4
Profit from continuing operations		1,515			687			120.6
Profit from corporate operations (net)		—			—			n.m	(1)
Profit		1,515			687			120.6
Profit attributable to non-controlling interests		(917	)		(316	)		n.m	(1)
Profit attributable to parent company		599			371			61.4

(1) Not meaningful.

119

As indicated above, during the year ended December 31, 2015, Garanti was fully consolidated by us following the acquisition of an additional 14.89% stake in Garanti in July 2015. Such consolidation affects the comparability of our results for the periods discussed herein for all the accounting lines items of the income statement. Additionally the Turkish lira depreciated 10% against the euro in average terms during 2016, resulting in a negative exchange rate effect on our consolidated income statement for the year ended December 31, 2016 and in the results of operations of the Turkey operating segment for such year expressed in euro. See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €3,404 million, a 55.1% increase compared with the €2,194 million recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti, which more than offset the adverse impact of exchange rates, as well as due to increases in volumes and yields on loans and a decreased cost of deposits.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €731 million, a 55.2% increase compared with the €471 million recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti which more than offset the adverse impact of changes in exchange rates (which had an estimated impact of €45 million). Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti and excluding the impact of variations in exchange rates, net fees and commissions increased mainly as a result of an increase in checks and bills receivables commissions and, to a lesser extent, due to an increase in contingent risk commissions.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2016 was a gain of €77 million, compared with the €273 million loss recorded for the year ended December 31, 2015, as a result mainly of capital gains from the divestment of ALCO portfolios, the proceeds of our sale of VISA Europe Ltd. to VISA Inc. in November 2015 (€87 million gross of tax) which were received in 2016 and gains on financial assets of the Global Markets unit in Turkey, partially offset by a negative exchange rate effect of €26 million.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2016 was an expense of €18 million, compared with operating income of €2 million recorded for the year ended December 31, 2015, mainly as a result of increased amounts payable as a contribution to the Deposit Guarantee Fund. Additionally there were higher expenses as a result of the high inflation rate and the investments made in the upgrading, modernization and digitalization of traditional channels.

120

Income and expenses on insurance and reinsurance contracts

Income and expenses on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2016 was an operating income of €64 million, a 62% increase compared with the €40 million of operating income recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 was an expense of €1,524 million, a 46.2% increase compared with the €1,043 million recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti which more than offset the impact of changes in exchange rates. Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, and excluding the impact of variations in exchange rates, the change in administration costs was mainly as a result of the high inflation, the 30% increase in the minimum wage since January 2016 and an increase in variable remuneration in personnel expenses.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2016 was a loss of €520 million, a 23.2% increase compared with the €422 million loss recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti which more than offset the impact of changes in exchange rates. Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, and excluding the impact of variations in exchange rates, the change in impairment losses on financial assets (net) was mainly as a result of increased impaired assets due to the increase in the loan portfolio and the deterioration in credit quality, and increased impairment losses related to the subsidiary in Romania. The non-performing asset ratio of this operating segment as of December 31, 2016 was 2.7% compared with 2.8% as of December 31, 2015.

Provisions or (-) reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €93 million, compared with the €2 million reversal recorded for the year ended December 31, 2015, and were mainly provisions for contingent liabilities and commitments.

Operating profit/(loss) before tax

As a result of the foregoing, operating profit/(loss) before tax of this operating segment for the year ended December 31, 2016 amounted to €1,906 million, a 123.5% increase compared with the €853 million recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2016 was an expense of €390 million, a 135.4% increase compared with the €166 million recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €599 million, a 61.4% increase compared with the €371 million recorded for the year ended December 31, 2015. A significant portion of our operating profit for this operating segment was attributable to our 100% consolidation of Garanti, but as we held only 39.90% of this entity during the year ended December 31, 2016, the majority of its operating profit was allocable to its other shareholders and was recorded in the Group’s consolidated income statement under “Profit attributable to non-controlling interests”.

121

REST OF EURASIA

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Net interest income		166			183			(9.7	)
Net fees and commissions		194			170			13.8
Net gains (losses) on financial assets and liabilities and exchange differences (net)		87			125			(30.3	)
Other operating income and expenses (net)		45			(6	)		n.m	(1)
Gross income		491			473			4.0
Administration costs		(330	)		(337	)		(2.0	)
Depreciation		(12	)		(15	)		(18.7	)
Net margin before provisions		149			121			23.6
Impairment losses on financial assets (net)		30			(4	)		n.m.	(1)
Provisions or (-) reversal of provisions		23			(6	)		n.m.	(1)
Operating profit/(loss) before tax		203			111			83.2
Tax expense or (-) income related to profit or loss from continuing operations		(52	)		(35	)		47.0
Profit from continuing operations		151			75			100.1
Profit from corporate operations (net)		—			—			—
Profit		151			75			100.1
Profit attributable to non-controlling interests		—			—			—
Profit attributable to parent company		151			75			100.1

⁽¹⁾  Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €166 million, a 9.7% decrease compared with the €183 million recorded for the year ended December 31, 2015, mainly due to the low interest rate environment, leading to fewer transactions, as a result of macroeconomic conditions in the Eurozone.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €194 million, a 13.8% increase compared with the €170 million recorded for the year ended December 31, 2015, mainly as a result of an increase in commissions which generated an increase of €18 million, and, to a lesser extent, due to an increase in securities fees which translated into a €9 million increase, partially offset by a €3 million decrease in contingent risk commissions.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2016 was a gain of €87 million, a 30.3% decrease compared with the €125 million gain recorded for the year ended December 31, 2015, mainly as a result of a lower contribution from trading income.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2016 was net income of €45 million, compared with the €6 million of net expense recorded for the year ended December 31, 2015, mainly as a result of a €46 million increase in income from dividends received from CNCB.

122

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €330 million, a 2% decrease compared with the €337 million recorded for the year ended December 31, 2015, mainly as a result of a €13 million decrease in personnel expenses, partially offset by an increase in other administrative expenses of €7 million. Among the main variations, fixed remuneration costs decreased by €16 million, and remuneration based on equity instruments decreased such costs by €4 million.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2016 amounted to €30 million gain, compared with the €4 million loss recorded for the year ended December 31, 2015, mainly as a result of the release of provisions in Portugal, Belgium and in the Corporate & Investment Banking unit for the European customers. The non-performing asset ratio of this operating segment as of December 31, 2016 was 2.7% compared with 2.5% as of December 31, 2015.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2016 amounted to operating profit of €203 million, an 83.2% increase compared with the €111 million of operating profit recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2016 was €52 million, a 47% increase compared with the €35 million expense recorded for the year ended December 31, 2015, mainly as a result of the higher operating income before tax.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €151 million, a 100.1% increase compared with the €75 million recorded for the year ended December 31, 2015.

MEXICO

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Net interest income		5,126			5,387			(4.9	)
Net fees and commissions		1,149			1,223			(6.1	)
Net gains (losses) on financial assets and liabilities and exchange differences (net)		222			198			12.3
Other operating income and expenses (net)		(237	)		(260	)		(8.9	)
Income and expenses (net) on insurance and reinsurance contracts		507			533			(4.9	)
Gross income		6,766			7,081			(4.4	)
Administration costs		(2,149	)		(2,403	)		(10.6	)
Depreciation		(247	)		(219	)		12.6
Net margin before provisions		4,371			4,459			(2.0	)
Impairment losses on financial assets (net)		(1,626	)		(1,633	)		(0.5	)
Provisions or (-) reversal of provisions		(67	)		(53	)		25.6
Operating profit/(loss) before tax		2,678			2,772			(3.4	)
Tax expense or (-) income related to profit or loss from continuing operations		(697	)		(678	)		2.7
Profit from continuing operations		1,981			2,094			(5.4	)
Profit from corporate operations (net)		—			—			—
Profit		1,981			2,094			(5.4	)
Profit attributable to non-controlling interests		(1	)		(1	)		n.m	(1)
Profit attributable to parent company		1,980			2,094			(5.4	)

⁽¹⁾  Not meaningful.

123

In 2016, the Mexican peso depreciated 14.8% against the euro in average terms, resulting in a negative exchange rate effect on our consolidated income statement for the year ended December 31, 2016 and in the results of operations of the Mexico operating segment for such year expressed in euro. See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €5,126 million, a 4.9% decrease compared with the €5,387 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso, which more than offset the higher volumes in lending and fund gathering.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €1,149 million, a 6.1% decrease compared with the €1,223 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €181 million). Excluding this impact, net fees and commissions increased mainly as a result of an increase in commissions for selling insurance, and, to a lesser extent, due to an increase in insurance product commissions, partially offset by a decrease in brokerage commissions.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2016 was a gain of €222 million, a 12.3% increase compared with the €198 million gain recorded for the year ended December 31, 2015, mainly as a result of gains derived from hedging activity partially offset by the impact of the depreciation of the Mexican peso in the last quarter of 2016.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2016 was other operating expenses of €237 million, compared with the €260 million of other operating expenses recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €38 million). Excluding this impact, other operating income and expenses (net) decreased mainly as a result of an increase in expenses related to non-banking activity (like administration costs relating to foreclosed assets) and expenses related to ATMs and frauds, partially offset by a €27 million decrease in the contribution to the Mexican Deposit Guarantee Fund (IPAB) year-on-year.

Income and expenses on insurance and reinsurance contracts

Income and expenses on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2016 was income of €507 million, a 4.9% decrease compared with income of €533 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €79 million).

124

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €2,149 million, a 10.6% decrease compared with the €2,403 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €355 million). Excluding this impact, administration costs increased mainly as a result of a €92 million increase in personnel expenses, primarily related to variable remuneration and, to a lesser extent, due to IT expenses, which increased costs by €23 million, and a €10 million increase in other administrative expenses for the ongoing renovation and remodeling of branch offices and the change of headquarters.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2016 was a loss of €1,626 million, a 0.5% decrease compared with the €1,633 million loss recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €241 million). Excluding this impact, the change in impairment losses on financial assets was mainly as a result of an increase in impaired assets due to the increase registered in the loan portfolio and the deterioration in credit quality. This increase in impairment losses on financial assets was partially offset due to higher recovery of written-off assets. The non-performing asset ratio of this operating segment as of December 31, 2016 was 2.3% compared with 2.6% as of December 31, 2015.

Provisions or (-) reversal of provisions

Provisions or (-) reversal of provisions in this operating segment for 2016 was €67 million compared with the €53 million recorded for 2015, as a result of higher provisions related to restructuring costs.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2016 amounted to operating profit of €2,678 million, a 3.4% decrease compared with the operating profit of €2,772 million recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2016 was an expense of €697 million, a 2.7% increase compared with the expense of €678 million recorded for the year ended December 31, 2015.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €1,980 million, a 5.4% decrease compared with the €2,094 million recorded for the year ended December 31, 2015.

125

SOUTH AMERICA

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Net interest income		2,930			3,202			(8.5	)
Net fees and commissions		634			718			(11.6	)
Net gains (losses) on financial assets and liabilities and exchange differences (net)		464			595			(22.0	)
Other operating income and expenses (net)		(133	)		(219	)		(39.4	)
Income and expenses (net) on insurance and reinsurance contracts		158			181			(12.8	)
Gross income		4,054			4,477			(9.5	)
Administration costs		(1,793	)		(1,875	)		(4.4	)
Depreciation		(100	)		(104	)		(3.3	)
Net margin before provisions		2,160			2,498			(13.5	)
Impairment losses on financial assets (net)		(526	)		(614	)		(14.2	)
Provisions or (-) reversal of provisions		(82	)		(71	)		15.2
Operating profit/(loss) before tax		1,552			1,814			(14.4	)
Tax expense or (-) income related to profit or loss from continuing operations		(487	)		(565	)		(13.8	)
Profit from continuing operations		1,065			1,248			(14.7	)
Profit from corporate operations (net)		—			—			—
Profit		1,065			1,248			(14.7	)
Profit attributable to non-controlling interests		(294	)		(343	)		(14.2	)
Profit attributable to parent company		771			905			(14.9	)

In the year ended December 31, 2016 the Group used the estimated exchange rate of 1,893 Venezuelan bolivars per euro, See “Presentation of Financial Information—Venezuela”. Additionally, all the currencies of the region depreciated in average terms against the euro compared with the year ended December 31, 2015 and resulted in a negative impact on the results of operations of the South America operating segment for the year ended December 31, 2016 expressed in euro. See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €2,930 million, an 8.5% decrease compared with the €3,202 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €572 million), which more than offset the increase in fees related to bills, receivables, checks and credit cards, particularly in Colombia and Argentina.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €634 million, an 11.6% decrease compared with the €718 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €131 million). Excluding this impact, net fees and commissions increased mainly as a result of an increase in credit and debit card commissions which generated an increase of €33 million, and, to a lesser extent, due to an increase in checks and bills receivables commissions which translated into a €26 million increase, partially offset by a €27 million decrease in other commissions. By country, the main variation was registered in Argentina where net fees and commissions, at constant exchange rates, increased by €19 million due to higher commissions as a result of local and regional incentives of VISA.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2016 was a gain of €464 million, a 22.0% decrease compared with the €595 million gain recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €172 million). By country, the main variation was registered in Colombia where net gains (losses) on financial assets and liabilities and exchange differences (net), at constant exchange rates, decreased by €75 million due to the fair value measurement of our previously acquired stake in Credibanco.

126

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2016 was an operating expense of €133 million, compared with the €219 million of operating expense recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €121 million). Excluding this impact, the change in other operating income and expenses (net) was mainly due to a €27 million decrease in other operating income. By country, the main variation was registered in Venezuela where other operating expenses, at constant exchange rates, increased by €30 million.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 was €1,793 million, a 4.4% decrease compared with the €1,875 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €348 million). Excluding this impact, administration costs increased mainly as a result of a €148 million increase in personnel expenses, and, to a lesser extent, due to a €118 million increase in other administrative expenses. Among the main variations, fixed remuneration increased the costs by €94 million, and IT expenses increased the costs by €24 million. All the changes were impacted by the high inflation in certain countries in the region. By country, the main variation was registered in Argentina where administration costs, at constant exchange rates, increased by €171 million mainly due to an increase in personnel expenses and other administrative expenses which was attributable in part to the high inflation.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2016 were €526 million, a 14.2% decrease compared with the €614 million recorded for the year ended December 31, 2015, mainly as a result of decreased impaired assets due to the decrease registered in the loan portfolio and the depreciation of the currencies of the region (which had an estimated impact of approximately €72 million). This decrease in impairment losses on financial assets was partially offset by the lower recovery of written-off assets. The non-performing asset ratio of this operating segment as of December 31, 2016 was 2.9% compared with 2.3% as of December 31, 2015. By country, the main variation was registered in Chile where impairment losses on financial assets, at constant exchange rates, decreased by €31 million.

Provisions or (-) reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €82 million, a 15.2% increase compared with the €71 million provisions recorded for the year ended December 31, 2015, mainly as a result of higher provisions relating to restructuring costs related to the Group’s transformation process.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2016 amounted to an operating profit of €1,552 million, a 14.4% decrease compared with the operating profit of €1,814 million recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2016 was an expense of €487 million, a 13.8% decrease compared with the €565 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso, and the lower operating profit before tax.

127

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €771 million, a 14.9% decrease compared with the €905 million recorded for the year ended December 31, 2015.

UNITED STATES

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Net interest income		1,953			1,811			7.9
Net fees and commissions		638			616			3.5
Net gains (losses) on financial assets and liabilities and exchange differences (net)		142			186			(23.6	)
Other operating income and expenses (net)		(27	)		18			n.m	(1)
Gross income		2,706			2,631			2.8
Administration costs		(1,652	)		(1,602	)		3.1
Depreciation		(190	)		(204	)		(6.7	)
Net margin before provisions		863			825			4.6
Impairment losses on financial assets (net)		(221	)		(142	)		56.0
Provisions or (-) reversal of provisions		(30	)		3			n.m	(1)
Operating profit/(loss) before tax		612			685			(10.6	)
Tax expense or (-) income related to profit or loss from continuing operations		(153	)		(168	)		(8.8	)
Profit from continuing operations		459			517			(11.2	)
Profit from corporate operations (net)		—			—			—
Profit		459			517			(11.2	)
Profit attributable to non-controlling interests		—			—			—
Profit attributable to parent company		459			517			(11.2	)

(1) Not meaningful.

In 2016 the U.S. dollar appreciated 0.2% against the euro on average terms, resulting in a positive exchange rate effect on our income statement and in the results of operations of the United States operating segment for the year ended December 31, 2016 expressed in euros. See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €1,953 million, a 7.9% increase compared with the €1,811 million recorded for the year ended December 31, 2015, mainly as a result of increased activity, particularly in loans and advances to customers, as well as improved pricing of such loans and advances driven by higher yields in new loan production and the lower cost of deposits.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €638 million, a 3.5% increase compared with the €616 million recorded for the year ended December 31, 2015, mainly as a result of an increase in securities fees which generated an impact of €123 million, and, to a lesser extent, due to an increase in checks and bills receivables commissions which translated into a €9 million increase, partially offset by a €108 million decrease in other commissions.

128

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2016 was a net gain of €142 million, a 23.6% decrease compared with the €186 million net gain recorded for the year ended December 31, 2015, mainly as a result of the difficult situation in the markets and lower sales of ALCO portfolios.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2016 was operating expense of €27 million, compared with the €18 million operating income recorded for the year ended December 31, 2015, mainly due to a €17 million decrease in dividends from the Federal Reserve System. In addition, in 2015 other operating income and expense (net) benefited from the income generated by the sale of Capital Investment Counsel Inc.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 was an expense of €1,652 million, a 3.1% increase compared with the €1,602 million expense recorded for the year ended December 31, 2015, mainly as a result of a €40 million increase in personnel expenses and, to a lesser extent, due to a €10 million increase in other administrative expenses. Among the main variations, fixed remuneration increased the costs by €29 million, and variable remuneration increased the costs by €13 million. Additionally, there was a positive exchange rate effect of €5 million.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2016 was a loss of €221 million, a 56% increase compared with the €142 million loss recorded for the year ended December 31, 2015, mainly as a result of increased impaired financial assets due to the increase registered in the loan portfolio and the deterioration in credit quality, particularly related to the rise in provisions following the rating downgrades on some companies that operate in the energy, metal and mining sectors during the first quarter of 2016. This increase in impairment losses on financial assets was partially offset by lower recovery of written-off assets. The non-performing asset ratio of this operating segment as of December 31, 2016 was 1.5% compared with 0.9% as of December 31, 2015.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2016 amounted to €612 million of operating profit, a 10.6% decrease compared with the €685 million of operating profit recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2016 was an expense of €153 million, an 8.8% decrease compared with the €168 million recorded for the year ended December 31, 2015, mainly as a result of the 10.6% decrease in the operating profit before tax.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €459 million, an 11.2% decrease compared with the €517 million recorded for the year ended December 31, 2015.

129

CORPORATE CENTER

	Year Ended December 31,
	2016			2015			Change
	(In Millions of Euros)						(In %)
Net interest income		(461	)		(424	)		8.7
Net fees and commissions		(133	)		(100	)		32.3
Net gains (losses) on financial assets and liabilities and exchange differences (net)		356			161			120.6
Other operating income and expenses (net)		199			191			4.3
Income and expenses (net) on insurance and reinsurance contracts		(21	)		(19	)		9.4
Gross income		(60	)		(192	)		(68.7	)
Administration costs		(541	)		(589	)		(8.2	)
Depreciation		(315	)		(237	)		33.1
Net margin before provisions		(916	)		(1,017	)		(10.0	)
Impairment losses on financial assets (net)		(37	)		(13	)		178.8
Provisions or (-) reversal of provisions		(140	)		(157	)		(10.4	)
Operating profit/(loss) before tax		(1,094	)		(1,187	)		(7.9	)
Tax expense or (-) income related to profit or loss from continuing operations		296			407			(27.2	)
Profit from continuing operations		(798	)		(781	)		2.2
Profit from corporate operations (net)		—			(1,109	)		n.m	(1)
Profit		(798	)		(1,890	)		(57.8	)
Profit attributable to non-controlling interests		(3	)		(19	)		n.m	(1)
Profit attributable to parent company		(801	)		(1,910	)		(58.1	)

(1) Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 was net interest expense of €461 million, an 8.7% increase compared with the €424 million of net interest expense recorded for the year ended December 31, 2015, primarily as a result of higher expenses related to the purchase price allocation of Catalunya Banc.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 was an expense of €133 million, compared with the €100 million expense recorded for the year ended December 31, 2015.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2016 was a gain of €356 million, a 120.6% increase compared with the €161 million gain recorded for the year ended December 31, 2015, mainly as a result of higher gains of the ALCO management.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2016 was operating income of €199 million, a 4.3% increase compared with the €191 million of operating income recorded for the year ended December 31, 2015, mainly as a result of the purchase price allocation of the current business of the insurance companies of Catalunya Banc(which contributed €9 million), partially offset by a €13 million decrease in the share of profit or loss of entities accounted for using the equity method.

130

Income and expenses on insurance and reinsurance contracts

Income and expenses on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2016 was expenses of €21 million, a 9.4% increase compared with expenses of €19 million recorded for the year ended December 31, 2015.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 was an expense of €541 million, an 8.2% decrease compared with the €589 million recorded for the year ended December 31, 2015, mainly as a result of a €49 million decrease in other administrative expenses, partially offset by an increase in personnel expenses. Among the main variations, branch allocation expenses decreased the costs by €70 million, and lower redundancy expenses decreased the costs by €21 million.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2016 was a loss of €37 million, a 178.8% increase compared with the €13 million recorded for the year ended December 31, 2015, mainly as a result of higher impairment of debt securities and higher country risk loan-loss provisions.

Provisions or (-) reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €140 million, a 10.4% decrease compared with the €157 million provisions recorded for the year ended December 31, 2015 due to lower provisions for early retirements.

Operating profit/(loss) before tax

As a result of the foregoing, operating profit/(loss) before tax of this operating segment for the year ended December 31, 2016 was a loss of €1,094 million, compared with the €1,187 million loss recorded for the year ended December 31, 2015.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2016 amounted to €296 million of income, compared with the €407 million of income recorded for the year ended December 31, 2015, mainly as a result of a lower operating loss before tax. In addition, in 2015 there were higher tax deductions as a result of the sale of participations.

Profit from corporate operations (net)

There was no profit from corporate operations (net) of this operating segment for the year ended December 31, 2016, whereas there was a €1,109 million loss recorded for the year ended December 31, 2015, which resulted from the sale of the 6.43% stake in CNCB.

Profit attributable to parent company

As a result of the foregoing, the profit attributable to parent company of this operating segment for the year ended December 31, 2016 was a loss of €801 million, compared with the €1,910 million loss recorded for the year ended December 31, 2015.

131

Results of Operations by Operating Segment for 2015 Compared with 2014

BANKING ACTIVITY IN SPAIN

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Net interest income		4,001			3,830			4.4
Net fees and commissions		1,605			1,453			10.5
Net gains (losses) on financial assets and liabilities and exchange differences (net)		1,013			1,149			(11.9	)
Other operating income and expenses (net)		185			189			(1.9	)
Gross income		6,804			6,621			2.8
Administration costs		(3,078	)		(2,735	)		12.5
Depreciation		(368	)		(301	)		22.3
Net margin before provisions		3,358			3,585			(6.3	)
Impairment losses on financial assets (net)		(1,332	)		(1,690	)		(21.2	)
Provisions or (-) reversal of provisions		(478	)		(623	)		(23.3	)
Operating profit/(loss) before tax		1,548			1,272			21.7
Tax expense or (-) income related to profit or loss from continuing operations		(456	)		(374	)		21.9
Profit from continuing operations		1,092			898			21.6
Profit from corporate operations (net)		—			—			—
Profit		1,092			898			21.6
Profit attributable to non-controlling interests		(6	)		(4	)		72.4
Profit attributable to parent company		1,085			894			21.4

The acquisition of Catalunya Banc in the second quarter of 2015 affects the comparability of our results for the periods discussed herein. See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”. In order to present certain year-on-year variations on a more comparable basis, we have presented in the discussion below certain adjusted variations which exclude the impact of the acquisition of Catalunya Banc. In order to exclude such impact in the discussion below, we have excluded Catalunya Banc’s results from our 2015 results. These adjusted variations are referred to below as variations “excluding the effect of the acquisition of Catalunya Banc”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2015 amounted to €4,001 million, a 4.4% increase compared with the €3,830 million recorded for the year ended December 31, 2014, mainly as a result of the acquisition of Catalunya Banc. Excluding the effect of the acquisition of Catalunya Banc there was a slight decrease of 1% in deposits and loans turnover in an environment of low interest rates (short-term Euribor rates turned negative in 2015) where lower yields on loans were partially offset by cheaper funding.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2015 amounted to €1,605 million, a 10.5% increase compared with the €1,453 million recorded for the year ended December 31, 2014, mainly as a result of the acquisition of Catalunya Banc, which represented 7.5 percentage points of the total increase in net fees and commissions of this operating segment during the year. Excluding the effect of the acquisition of Catalunya Banc, there was a 3% increase driven, among other effects, by the 10% year-on-year increase in volume of mutual and pension funds that led to higher fees and commissions.

132

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2015 was a gain of €1,013 million, a 11.9% decrease compared with the €1,149 million gain recorded for the year ended December 31, 2014, mainly as a result of a decrease in gains from debt securities and lower ALCO portfolio sales.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2015 was operating income of €185 million, a 1.9% decrease compared with the €189 million of operating income recorded for the year ended December 31, 2014, mainly as a result of higher contributions to the local deposit guarantee fund as a result of the acquisition of Catalunya Banc and the first contribution to the national resolution fund.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2015 was an expense of €3,078 million, 12.5% higher compared with the €2,735 million in expenses recorded for the year ended December 31, 2014, substantially all of which was a result of the acquisition of Catalunya Banc. Excluding the effect of the acquisition of Catalunya Banc, administration costs decreased 0.3%.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2015 was a loss of €1,332 million, a 21.2% decrease compared with the €1,690 million recorded for the year ended December 31, 2014, mainly as a result of the continued improvement of credit quality, the decrease of non-performing loans (excluding Catalunya Banc) and the lower deterioration of collateral value of the loans. This operating segment’s non-performing asset ratio increased to 6.6% as of December 31, 2015 from 6.0% as of December 31, 2014 as a result of the acquisition of Catalunya Banc, offset in part by a decline in the non-performing assets ratio in other areas of this operating segment. Excluding the effect of the acquisition of Catalunya Banc, the ratio decreased to 5.6%.

Provisions or (-) reversal of provisions

Provisions of this operating segment for the year ended December 31, 2015 totaled €478 million, 23.3% lower compared with the €623 million provisions recorded for the year ended December 31, 2014, mainly as a result of lower provisions for early retirements.

Operating profit/(loss) before tax

As a result of the foregoing, operating profit/(loss) before tax of this operating segment for the year ended December 31, 2015 amounted to €1,548 million of operating profit, a 21.7% increase compared with the €1,272 million of operating profit recorded for the year ended December 31, 2014.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2015 was an expense of €456 million, a 21.9% increase compared with the €374 million expense recorded for the year ended December 31, 2014, mainly as a result of the 21.7% increase in operating profit before tax. Such income tax was levied at a 30% tax rate.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2015 amounted to €1,085 million, a 21.4% increase compared with the €894 million recorded for the year ended December 31, 2014.

133

REAL ESTATE ACTIVITY IN SPAIN

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Net interest income		71			(34	)		n.m.	(1)
Net fees and commissions		2			5			(60.0	)
Net gains (losses) on financial assets and liabilities and exchange differences (net)		4			(2	)		n.m.	(1)
Other operating income and expenses (net)		(105	)		(180	)		(51.7	)
Gross income		(28	)		(211	)		(86.7	)
Administration costs		(101	)		(123	)		(17.9	)
Depreciation		(25	)		(23	)		8.7
Net margin before provisions		(154	)		(357	)		(56.9	)
Impairment losses on financial assets (net)		(179	)		(297	)		(39.7	)
Provisions or (-) reversal of provisions		(383	)		(621	)		(38.3	)
Operating profit/(loss) before tax		(716	)		(1,275	)		(43.8	)
Tax expense or (-) income related to profit or loss from continuing operations		221			386			(42.7	)
Profit from continuing operations		(495	)		(889	)		(44.3	)
Profit from corporate operations (net)		—			—			—
Profit		(495	)		(889	)		(44.3	)
Profit attributable to non-controlling interests		(1	)		—			n.m.	(1)
Profit attributable to parent company		(496	)		(889	)		(44.3	)

(1) Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2015 amounted to net interest income of €71 million, compared with the net interest expense of €34 million recorded for the year ended December 31, 2014, mainly as a result of a decline in the cost of finance and higher financial income due to higher recovery of written-off assets.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2015 amounted to €2 million, a 60.0% decrease compared with the €5 million recorded for the year ended December 31, 2014.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2015 was a gain of €4 million, compared with the €2 million loss recorded for the year ended December 31, 2014, mainly as a result of portfolio sales.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2015 was an operating expense of €105 million, compared with the €180 million expense recorded for the year ended December 31, 2014, mainly as a result of higher capital gains from sales of real estate assets. In 2015 the demand for residential real estate assets increased in an environment of slightly rising prices.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2015 was an expense of €101 million, 17.9% lower compared with the €123 million expense recorded for the year ended December 31, 2014, mainly as a result of a 18.8% decrease in personnel expenses due to the transfer of some workforce to the Banking Activity in Spain segment and a 9.3% decrease in other administrative expenses.

134

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2015 was €179 million, a 39.7% decrease compared with the €297 million recorded for the year ended December 31, 2014, mainly as a result of higher recovery of written-off assets as well as lower losses from real estate asset collateral.

Provisions or (-) reversal of provisions

Provisions of this operating segment for the year ended December 31, 2015 totaled €383 million, compared with the €621 million provisions recorded for the year ended December 31, 2014, mainly as a result of a decrease in foreclosed assets write-downs and foreclosed additions.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2015 was a loss of €716 million, a 43.8% decrease compared with the €1,275 million loss recorded for the year ended December 31, 2014.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2015 amounted to a gain of €221 million, a 42.7% decrease compared with the €386 million gain recorded for the year ended December 31, 2014, mainly as a result of the 43.8% decrease of the operating loss before tax. Such income tax was levied at a 30% tax rate.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2015 was a loss of €496 million, compared with the €889 million loss recorded for the year ended December 31, 2014.

TURKEY

From July 2015 to March 2017, we held 39.90% of Garanti’s share capital and we fully consolidated Garanti’s results in our consolidated financial statements. Information for 2014 and, with respect to 2015, information from January 1 through June 30 has been calculated and is presented under management criteria according to which the assets, liabilities and income statement of Garanti are included in every line item of the balance sheet and the income statement based on our 25.01% interest in Garanti until July 2015.

On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “Item 4. Information on the Company—History and Development of the Company—Capital expenditures—2017.”

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Net interest income		2,194			735			198.5
Net fees and commissions		471			191			146.6
Net gains (losses) on financial assets and liabilities and exchange differences (net)		(273	)		1			n.m.	(1)
Other operating income and expenses (net)		42			18			133.3
Gross income		2,434			944			157.8
Administration costs		(1,043	)		(359	)		190.5
Depreciation		(118	)		(35	)		237.1
Net margin before provisions		1,273			550			131.5
Impairment losses on financial assets (net)		(422	)		(146	)		189.0
Provisions or (-) reversal of provisions		2			(11	)		n.m.	(1)
Operating profit/(loss) before tax		853			392			117.6
Tax expense or (-) income related to profit or loss from continuing operations		(166	)		(82	)		102.4
Profit from continuing operations		687			310			121.6
Profit from corporate operations (net)		—			—			—
Profit		687			310			121.2
Profit attributable to non-controlling interests		(316	)		—			n.m.	(1)
Profit attributable to parent company		371			310			19.7

(1) Not meaningful.

135

As indicated above, during the year ended December 31, 2015, Garanti was fully consolidated by us following the acquisition of an additional 14.89% stake in Garanti in July 2015. Such consolidation affects the comparability of our results for the periods discussed herein for all the accounting lines items of the income statement. Additionally the TL depreciated 4.1% against the euro in average terms during 2015, resulting in a negative exchange rate effect on our income statement. See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

In order to present certain year-on-year variations on a more comparable basis, we have presented below certain adjusted variations which exclude the impact of the acquisition of the additional 14.89% stake in Garanti and the change in the consolidation method of Garanti. In order to exclude such impact we have consolidated Garanti’s results in 2015 based on our prior stake (25.01%) and in accordance with management criteria (pursuant to which Garanti’s information has been proportionally consolidated based on such stake in Garanti). These adjusted variations are referred to below as variations “excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2015 amounted to €2,194 million, a 198.5% increase compared with the €735 million recorded for the year ended December 31, 2014, as a result of the change in the consolidation method of Garanti. Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, there was a 15.7% increase mainly as a result of increased volumes of loans resulting from new loan production in most portfolios especially mortgage loans and loans to the energy sector and service sector. Such increase was partially offset by the depreciation of the TL year-on-year.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2015 amounted to €471 million, a 146.6% increase compared with the €191 million recorded for the year ended December 31, 2014, mainly as a result of the resulting change in the consolidation method of Garanti. Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, there was a 1.8% decrease mainly due to the depreciation of the TL year-on-year.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2015 was a loss of €273 million, compared with the €1 million gain recorded for the year ended December 31, 2014, mainly as a result of trading losses resulting from derivative transactions affected by volatility in the wholesale financial markets particularly in the last quarter of 2015.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2015 was operating income of €42 million compared with the €18 million of operating income recorded for the year ended December 31, 2014, mainly as a result of the resulting change in the consolidation method of Garanti. Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, there was a 4.7% decrease due to the negative exchange rate effect.

136

Administration costs

Administration costs of this operating segment for the year ended December 31, 2015 was an expense of €1,043 million compared with the €359 million recorded for the year ended December 31, 2014, mainly as a result of the resulting change in the consolidation method of Garanti. Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, there was a 2.6% increase due to the impact of high inflation rates (8.8% as of December 2015 and 8.2% as of December 2014) partially offset by the effect of the depreciation of the TL and the effect of the depreciation of the TL for costs denominated in other currencies.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2015 was a loss of €422 million compared with the €146 million loss recorded for the year ended December 31, 2014, mainly as a result of the resulting change in the consolidation method of Garanti. Excluding the effect acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, there was a 6.5% increase, in line with the growth of the activity during the year. This operating segment’s non-performing asset ratio was 2.8% as of December 31, 2015 and December 31, 2014.

Operating profit/(loss) before tax

As a result of the foregoing, operating profit/(loss) before tax of this operating segment for the year ended December 31, 2015 amounted to operating profit of €853 million compared with the €392 million recorded for the year ended December 31, 2014.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2015 was an expense of €166 million compared with the €82 million expense recorded for the year ended December 31, 2014, mainly as a result of the above mentioned change in the consolidation method of Garanti and the resulting increase in operating profit before tax.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2015 amounted to €371 million, a 19.7% increase compared with the €310 million recorded for the year ended December 31, 2014.

REST OF EURASIA

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Net interest income		183			189			(2.9	)
Net fees and commissions		170			187			(9.2	)
Net gains (losses) on financial assets and liabilities and exchange differences (net)		125			150			(16.5	)
Other operating income and expenses (net)		(6	)		209			n.m.	(1)
Gross income		473			736			(35.8	)
Administration costs		(337	)		(331	)		1.7
Depreciation		(15	)		(12	)		29.1
Net margin before provisions		121			393			(69.2	)
Impairment losses on financial assets (net)		(4	)		(56	)		(93.3	)
Provisions or (-) reversal of provisions		(6	)		(16	)		(61.8	)
Operating profit/(loss) before tax		111			320			(65.4	)
Tax expense or (-) income related to profit or loss from continuing operations		(35	)		(65	)		(45.8	)
Profit from continuing operations		75			255			(70.4	)
Profit from corporate operations (net)		—			—			—
Profit		75			255			(70.4	)
Profit attributable to non-controlling interests		—			—			—
Profit attributable to parent company		75			255			(70.4	)

(1) Not meaningful.

137

Net interest income

Net interest income of this operating segment for the year ended December 31, 2015 amounted to €183 million, a 2.9% decrease compared with the €189 million recorded for the year ended December 31, 2014, mainly as a result of narrowing spreads for new lending transactions, particularly in the wholesale business during 2015.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2015 amounted to €170 million, a 9.2% decrease compared with the €187 million recorded for the year ended December 31, 2014, mainly as a result of the lower volume of transactions and reduced fee generation in other service fees from Corporate Investment Banking in Europe.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2015 was a gain of €125 million, a 16.5% decrease compared with the €150 million gain recorded for the year ended December 31, 2014, mainly as a result of the lower contribution from trading income.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2015 was an expense of €6 million, compared with the €209 million gain recorded for the year ended December 31, 2014 relating to dividends from CNCB. In 2015, CNCB distributed no dividends.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2015 were €337 million, a 1.7% increase compared with the €331 million recorded for the year ended December 31, 2014, mostly as a result of the exchange rate effect.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2015 resulted in a loss of €4 million, a 93.3% decrease compared with the €56 million loss recorded for the year ended December 31, 2014, mainly as a result of lower impairment losses in Portugal related to mortgage loans. This operating segment’s non-performing asset ratio decreased to 2.5% as of December 31, 2015, from 3.7% as of December 31, 2014.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2015 amounted to operating profit of €111 million, a 65.4% decrease compared with the €320 million of operating profit recorded for the year ended December 31, 2014.

138

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2015 was an expense of €35 million, a 45.8% decrease compared with the €65 million expense recorded for the year ended December 31, 2014, mainly as a result of the decrease in operating profit before tax. Such income tax was levied at a 10% tax rate.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2015 amounted to €76 million, a 70.4% decrease compared with the €255 million recorded for the year ended December 31, 2014.

MEXICO

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Net interest income		5,387			4,906			9.8
Net fees and commissions		1,223			1,166			4.9
Net gains (losses) on financial assets and liabilities and exchange differences (net)		198			195			1.5
Other operating income and expenses (net)		273			246			11.0
Gross income		7,081			6,513			8.7
Administration costs		(2,403	)		(2,226	)		7.9
Depreciation		(219	)		(187	)		17.1
Net margin before provisions		4,459			4,100			8.7
Impairment losses on financial assets (net)		(1,633	)		(1,517	)		7.6
Provisions or (-) reversal of provisions		(53	)		(75	)		(29.3	)
Operating profit/(loss) before tax		2,772			2,508			10.5
Tax expense or (-) income related to profit or loss from continuing operations		(678	)		(607	)		11.7
Profit from continuing operations		2,094			1,900			10.2
Profit from corporate operations (net)		—			—			—
Profit		2,094			1,900			10.2
Profit attributable to non-controlling interests		(1	)		2			—
Profit attributable to parent company		2,094			1,903			10.0

In 2015, the Mexican peso appreciated 0.3% against the euro in average terms, resulting in a positive exchange rate effect on our income statement for the year ended December 31, 2015 See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2015 amounted to €5,387 million, a 9.8% increase compared with the €4,906 million recorded for the year ended December 31, 2014, mainly as a result of the growth in activity, particularly growth in loans and advances to customers which generated €665 million of net interest income during 2015, partially offset by narrower spreads.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2015 amounted to €1,223 million, a 4.9% increase compared with the €1,166 million recorded for the year ended December 31, 2014, mainly as a result of higher revenues from transfers and other payment orders and from credit and debit cards mainly due to the improvement in domestic demand.

139

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2015 was a gain of €198 million, a 1.5% increase compared with the €195 million gain recorded for the year ended December 31, 2014, mainly as a result of the impact of the appreciation of the Mexican peso in the net exchange differences partially offset by a lower contribution from trading income.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2015 was operating income of €273 million, a 11.0% increase compared with the €246 million of other operating income recorded for the year ended December 31, 2014, mainly as a result of an 11.3% increase in income on insurance and reinsurance contracts partially offset by higher contributions to the deposit guarantee fund due to the larger liability volume.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2015 were €2,403 million, a 7.9% increase compared with the €2,226 million recorded for the year ended December 31, 2014, mainly as a result of the construction of new headquarters (in particular, the Bancomer tower which was inaugurated in February 2016), which was adversely affected by the depreciation of the Mexican peso against the U.S. dollar, the implementation of a project pursuing branch improvements and the addition of 392 employees during 2015.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2015 resulted in a loss of €1,633 million, a 7.6% increase compared with the €1,517 million loss recorded for the year ended December 31, 2014, mainly as a result of the 11.3% increase registered in the loan portfolio and the 1.9% decrease in non-performing assets. Additionally, there was a positive exchange rate effect of 0.3%. This operating segment’s non-performing asset ratio decreased to 2.6% as of December 31, 2015, from 2.9% as of December 31, 2014.

Provisions or (-) reversal of provisions

Provisions in this operating segment for 2015 totaled €53 million compared with the €75 million provisions recorded for 2014, mainly due to lower provisions for early retirements.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit before tax of this operating segment for the year ended December 31, 2015 amounted to €2,772 million, a 10.5% increase compared with the €2,508 million recorded for the year ended December 31, 2014.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2015 was an expense of €678 million, a 11.7% increase compared with the €607 million recorded for the year ended December 31, 2014, mainly as a result of the increase in the operating profit before tax. Such income tax was levied at a 30% tax rate.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2015 amounted to €2,094 million, a 10.0% increase compared with the €1,903 million recorded for the year ended December 31, 2014.

140

SOUTH AMERICA

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Net interest income		3,202			4,699			(31.8	)
Net fees and commissions		718			901			(20.4	)
Net gains (losses) on financial assets and liabilities and exchange differences (net)		595			482			23.5
Other operating income and expenses (net)		(38	)		(890	)		(95.7	)
Gross income		4,477			5,191			(13.8	)
Administration costs		(1,875	)		(2,137	)		(12.3	)
Depreciation		(104	)		(179	)		(41.9	)
Net margin before provisions		2,498			2,875			(13.1	)
Impairment losses on financial assets (net)		(614	)		(706	)		(13.1	)
Provisions or (-) reversal of provisions		(71	)		(219	)		(67.6	)
Operating profit/(loss) before tax		1,814			1,951			(7.0	)
Tax expense or (-) income related to profit or loss from continuing operations		(565	)		(490	)		15.4
Profit from continuing operations		1,248			1,461			(14.5	)
Profit from corporate operations (net)		—			—			—
Profit		1,248			1,461			(14.5	)
Profit attributable to non-controlling interests		(343	)		(460	)		(25.4	)
Profit attributable to parent company		905			1,001			(9.6	)

In the year ended December 31, 2015 the Group used the estimated exchange rate of 469 Venezuelan bolivars per euro, See “Presentation of Financial Information—Venezuela”. Additionally, the Colombian peso depreciated in average terms against the euro compared with the year ended December 31, 2014. Such depreciation more than offset the period-average appreciation of other currencies in the region and resulted in a negative impact on the results of operations of the South America operating segment for the year ended December 31, 2015 expressed in euro. See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2015 amounted to €3,202 million, a 31.8% decrease compared with the €4,699 million recorded for the year ended December 31, 2014, mainly as a result of the impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso. Excluding the impact of the depreciation of the Venezuelan bolivar and the Colombian peso, net interest income increased by 13.0% as a result of increased volumes due to new loan production in most portfolios and countries, particularly in Argentina.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2015 amounted to €718 million, a 20.4% decrease compared with the €901 million recorded for the year ended December 31, 2014, mainly as a result of the impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso. Excluding the impact of the depreciation of the Venezuelan bolivar and the Colombian peso, there was a 14.8% increase as a result of higher revenues particularly in Argentina, where fees and commissions related to transfers and other payment orders increased by 31.2%, fees and commissions related to credit and debit cards increased by 29.4% and fees and commissions related to custody securities increased by 18.7%, as well as in Peru where fees and commissions related to securities management and custody increased by 20%.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2015 was a gain of €595 million, a 23.5% increase compared with the €482 million gain recorded for the year ended December 31, 2014, mainly as a result of the impact of the exchange differences and capital gains derived from U.S. dollar positions in Venezuela and Peru, which was partially offset by trading losses in Peru due to derivative transactions affected by volatility in the wholesale financial markets.

141

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2015 was an operating expense of €38 million, compared with the €890 million of operating expenses recorded for the year ended December 31, 2014 mainly as a result of the adjustment for hyperinflation in Venezuela. Additionally, in 2015 there were contributions of €41 additional million to the deposit guarantee fund due to a larger volume of liabilities especially in Argentina, offset by a €49 million increase in income derived from insurance and reinsurance contracts mainly in Argentina and, to a lesser extent, in Chile and Colombia.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2015 were €1,875 million, a 12.3% decrease compared with the €2,137 million recorded for the year ended December 31, 2014, mainly as a result of the impact of the depreciation of the Venezuelan bolivar and the Colombian peso. Excluding the impact of the depreciation of the Venezuelan bolivar and the Colombian peso, there was a 15.2% increase mainly due to Argentina, which accounted for nearly two thirds of the increase, and Venezuela. In Argentina there was a 31.7% increase in administration costs, in line with the estimated inflation rate as of December 2015 (approximately 30%). In Venezuela, the estimated inflation rate as of December 2015 was approximately 170%.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2015 were €614 million, a 13.1% decrease compared with the €706 million loss recorded for the year ended December 31, 2014, mainly as a result of the impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso. Excluding this effect, there was a 27.8% increase, with all countries showing a similar evolution, mainly as a result of the 16.6% increase registered in the loan portfolio, particularly loans to enterprises and credit cards and consumer finance loans mainly in Argentina and Colombia. This operating segment’s non-performing asset ratio increased to 2.3% as of December 31, 2015, from 2.1% as of December 31, 2014.

Provisions or (-) reversal of provisions

Provisions in this operating segment for the year ended December 31, 2015 totaled €71 million, compared with the €219 million provisions recorded for the year ended December 31, 2014, mainly as a result of the impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso. Additionally, provisions for early retirement decreased by €25 million in Argentina and in Chile legal contingencies decreased by €52 million. Such legal contingencies were related to Corredora de Bolsa and had been recorded in 2014.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2015 amounted to operating profit of €1,814 million, a 7.0% decrease compared with the €1,951 million of operating profit recorded for the year ended December 31, 2014. Excluding the impact of the depreciation of the Venezuelan bolivar and the Colombian peso, operating profit increased by 14.9%.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2015 was an expense of €565 million, a 15.4% increase compared with the €490 million recorded for the year ended December 31, 2014, mainly as a result of the increased operating profit before tax in certain regions, particularly Argentina, and the tax credit recorded in Chile in 2014, following the revision of our deferred tax assets and liabilities in such country per the new tax rate. These effects were partially offset by the impact of the depreciation of the Venezuelan bolivar and, to a lesser extent, the Colombian peso.

142

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2015 amounted to €905 million, a 9.6% decrease compared with the €1,001 million recorded for the year ended December 31, 2014.

UNITED STATES

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Net interest income		1,811			1,443			25.5
Net fees and commissions		616			553			11.2
Net gains (losses) on financial assets and liabilities and exchange differences (net)		186			145			28.3
Other operating income and expenses (net)		18			(4	)		n.m.	(1)
Gross income		2,631			2,137			23.1
Administration costs		(1,602	)		(1,318	)		21.5
Depreciation		(204	)		(179	)		13.9
Net margin before provisions		825			640			28.9
Impairment losses on financial assets (net)		(142	)		(68	)		108.8
Provisions or (-) reversal of provisions		3			(10	)		n.m.	(1)
Operating profit/(loss) before tax		685			561			22.1
Tax expense or (-) income related to profit or loss from continuing operations		(168	)		(133	)		26.3
Profit from continuing operations		517			428			20.8
Profit from corporate operations (net)		—			—			—
Profit		517			428			20.8
Profit attributable to non-controlling interests		—			—			—
Profit attributable to parent company		517			428			20.8

(1) Not meaningful.

In 2015 the U.S. dollar appreciated 16.5% against the euro on average terms, resulting in a positive exchange rate effect on our income statement. See “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2015 amounted to €1,811 million, a 25.5% increase compared with the €1,443 million recorded for the year ended December 31, 2014, mainly as a result of the impact of the appreciation of the U.S. dollar. Excluding the impact of the appreciation of the U.S. dollar, there was a 4.9% increase as a result of growth in activity, especially in loans and advances to customers partially offset by a negative price effect as a result of the narrow spreads. On December 16, 2015 the Federal Reserve approved a 25 basis points interest rate increase, the first since June 2006.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2015 amounted to €616 million, a 11.2% increase compared with the €553 million recorded for the year ended December 31, 2014, mainly as a result of the impact of the appreciation of the U.S. dollar. Excluding the impact of the appreciation of the U.S. dollar, there was a 6.9% decrease due to lower revenues from securities services (11.2% decrease) and from credit and debit cards (8.2% decrease).

143

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2015 was a gain of €186 million, a 28.3% increase compared with the €145 million gain recorded for the year ended December 31, 2014, mainly as a result of the impact of the exchange rate and higher contribution from trading income due to the sale of ALCO portfolios.

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2015 was operating income of €18 million, compared with the €4 million operating expense recorded for the year ended December 31, 2014, mainly as a result of the impact of the appreciation of the U.S. dollar and the sale of Capital Investment Counsel Inc.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2015 was an expense of €1,602 million, a 21.5% increase compared with the €1,318 million expense recorded for the year ended December 31, 2014, mainly as a result of the impact of the appreciation of the U.S. dollar. Excluding the impact of the appreciation of the U.S. dollar, there was a 1.7% increase, higher than the 0.73% inflation rate for 2015, mainly as a result of an increase in marketing expenses, equipment expenses and, to a lesser extent, in wages and salaries.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2015 was a loss of €142 million, a 108.8% increase compared with the €68 million loss recorded for the year ended December 31, 2014, mainly as a result of increased impaired financial assets, particularly in the commercial portfolio in the oil and gas sector after the fall in oil prices. Additionally, impairment losses on financial assets (net) were negatively affected by the appreciation of the U.S. dollar.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2015 amounted to €685 million of operating profit, a 22.1% increase compared with the €561 million of operating profit recorded for the year ended December 31, 2014.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations of this operating segment for the year ended December 31, 2015 was an expense of €168 million, a 26.3% increase compared with the €133 million recorded for the year ended December 31, 2014, mainly as a result of the 22.1% increase in the operating profit before tax.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2015 amounted to €517 million, a 20.8% increase compared with the €428 million recorded for the year ended December 31, 2014.

144

CORPORATE CENTER

	Year Ended December 31,
	2015			2014			Change
	(In Millions of Euros)						(In %)
Net interest income		(424	)		(651	)		(34.8	)
Net fees and commissions		(100	)		(91	)		10.1
Net gains (losses) on financial assets and liabilities and exchange differences (net)		161			14			n.m.	(1)
Other operating income and expenses (net)		172			153			12.4
Gross income		(192	)		(575	)		(66.6	)
Administration costs		(589	)		(541	)		8.9
Depreciation		(237	)		(264	)		(10.2	)
Net margin before provisions		(1,017	)		(1,380	)		(26.3	)
Impairment losses on financial assets (net)		(13	)		(4	)		225.0
Provisions or (-) reversal of provisions		(157	)		(282	)		(44.4	)
Operating profit/(loss) before tax		(1,187	)		(1,666	)		(28.7	)
Tax expense or (-) income related to profit or loss from continuing operations		407			384			6.0
Profit from continuing operations		(781	)		(1,282	)		(39.0	)
Profit from corporate operations (net)		(1,109	)		—			n.m.	(1)
Profit		(1,890	)		(1,282	)		47.4
Profit attributable to non-controlling interests		(19	)		(3	)		n.m.	(1)
Profit attributable to parent company		(1,910	)		(1,285	)		48.6

(1) Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2015 was a loss of €424 million, compared with the €651 million loss recorded for the year ended December 31, 2014. This 34.8% decrease was mainly attributable to the decrease in interest rates which reduced the cost of some preferred securities issued by Unnim.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2015 was a loss of €100 million, compared with the €91 million loss recorded for the year ended December 31, 2014.

Net gains (losses) on financial assets and liabilities and exchange differences (net)

Net gains (losses) on financial assets and liabilities and exchange differences (net) of this operating segment for the year ended December 31, 2015 was a gain of €161 million, compared with the €14 million gain recorded for the year ended December 31, 2014, mainly as a result of gains derived from the hedging activity (mainly related to the Swiss franc and the Chilean peso).

Other operating income and expenses (net)

Other operating income and expenses (net) of this operating segment for the year ended December 31, 2015 was operating income of €172 million, a 12.4% increase compared with the €153 million of operating income recorded for the year ended December 31, 2014, mainly as a result of a positive share of profit of entities accounted for using the equity method compared with the €34 million loss in 2014 and an increase of the dividends received from Telefónica (which amounted to €27 million in 2015 compared with €25 million in 2014).

Administration costs

Administration costs of this operating segment for the year ended December 31, 2015 were €589 million, an 8.9% increase compared with the €541 million recorded for the year ended December 31, 2014, mainly as a result of higher restructuring costs and early retirement expenses.

Impairment losses on financial assets (net)

Impairment losses on financial assets (net) of this operating segment for the year ended December 31, 2015 resulted in a loss of €13 million, compared with the €4 million recorded for the year ended December 31, 2014.

145

Provisions or (-) reversal of provisions

Provisions in this operating segment for the year ended December 31, 2015 totaled €157 million, compared with the €282 million provisions recorded for the year ended December 31, 2014, mainly as a result of lower provisions for early retirements.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit/(loss) before tax of this operating segment for the year ended December 31, 2015 was a loss of €1,187 million, compared with the €1,666 million loss recorded for the year ended December 31, 2014.

Tax expense or (-) income related to profit or loss from continuing operations

Tax expense or (-) income related to profit or loss from continuing operations for the year ended December 31, 2015 amounted to €407 million of income, compared with the €384 million of income recorded for the year ended December 31, 2014.

Profit from corporate operations (net)

Profit from corporate operations (net) of this operating segment for the year ended December 31, 2015 was a loss of €1,109 million, compared with no gain or loss for 2014. This loss was mainly the result of the fair value measurement of the stake we already held in Garanti at the time we acquired our additional 14.89% stake in Garanti, which we had to make as a result of the purchase of an additional stake in Garanti and the resulting change in its consolidation method, which resulted in a €1,840 million loss, partially offset by the €705 million capital gains from the sale of the 6.34% stake in CNCB.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2015 was a loss of €1,910 million, compared with the €1,285 million loss recorded for the year ended December  31, 2014.

B. Liquidity and Capital Resources

Liquidity risk management and controls are explained in Note 7.5.1 to the Consolidated Financial Statements. In addition, information on encumbered assets is provided in Note 7.5.2 to the Consolidated Financial Statements. For information concerning our short-term borrowing, see “Item 4. Information on the Company—Selected Statistical Information—Liabilities—Short-term Borrowings”.

Liquidity and finance management of the BBVA Group’s balance sheet seeks to fund the growth of the banking business at suitable maturities and costs, using a wide range of instruments that provide access to a large number of alternative sources of finance.

A core principle in the BBVA Group’s liquidity and finance management is the financial independence of its banking subsidiaries. This aims to ensure that the cost of liquidity is correctly reflected in price formation. Accordingly, we maintain a liquidity pool at an individual entity level at each of Banco Bilbao Vizcaya Argentaria, S.A. and our banking subsidiaries, including BBVA Compass, BBVA Bancomer, Garanti and our Latin American subsidiaries.

146

The table below shows the composition of the liquidity pool of Banco Bilbao Vizcaya Argentaria, S.A. and each of our significant subsidiaries as of December 31, 2016:

	BBVA Eurozone (1)		BBVA Bancomer		BBVA Compass		Garanti		Others
	(In Millions of Euros)
Cash and balances with central banks		16,038		8,221		1,495		4,758		6,504
Assets for credit operations with central banks		50,706		4,175		26,865		4,935		4,060
Central governments issues		30,702		1,964		1,084		4,935		3,985
Of Which: Spanish government securities		23,353		—		—		—		—
Other issues		20,005		2,212		8,991		—		75
Loans		—		—		16,790		—		—
Other non-eligible liquid assets		6,884		938		662		1,478		883
Accumulated available balance		73,629		13,335		29,022		11,171		11,447
Average balance (2)		68,322		13,104		27,610		12,871		11,523

⁽¹⁾ Includes Banco Bilbao Vizcaya Argentaria, S.A. and Banco Bilbao Vizcaya Argentaria (Portugal), S.A.

⁽²⁾ Average balance for the year ended December 31, 2016, based on the beginning and the day-end balances during each period.

Management of liquidity and structural finance within the BBVA Group is based on the principle of the financial autonomy of the entities that make it up. This approach helps prevent and limit liquidity risk by reducing the Group’s vulnerability in periods of high risk. This decentralized management also helps avoid possible contagion due to a crisis that could affect only one or several BBVA Group entities, which must cover their liquidity needs independently in the markets where they operate. Liquidity Management Units (LMUs) have been set up for this reason in the geographical areas where the main foreign subsidiaries operate, and also for the parent company of the Group (Banco Bilbao Vizcaya Argentaria, S.A.) within the Euro currency scope, which LMU includes BBVA Portugal, S.A.

The Finance Division, through Global Asset Liabilities Management (ALM), manages the BBVA Group’s liquidity and funding. It plans and executes the funding of the long-term structural gap of each LMU and proposes to ALCO the actions to adopt in this regard in accordance with the policies and limits established by the Executive Committee.

As a first core element, the Bank’s target behavior in terms of liquidity and funding risk is characterized through the Liquidity Coverage Ratio (LCR) and the Loan-to-Stable-Customer-Deposits (LtSCD) ratio. LCR is a regulatory measurement aimed at ensuring entities’ resilience in a scenario of liquidity stress within a time horizon of 30 days. BBVA, within its risk appetite framework and its limits and alerts schemes, has established requirements for compliance with the LCR ratio both for the Group as a whole and for each of the LMUs individually. The internal levels required are designed to comply in advance with the implementation of the regulatory requirements of 2018, at a level above 100%.

For the purpose of establishing the (maximum) target levels for LtSCD in each LMU and providing an optimal funding structure reference in terms of risk appetite, Global Risk Management (“GRM”)-Structural Risks identifies and assesses the economic and financial variables that condition the funding structures in the various geographical areas. The behavior of the indicators reflects that the funding structure remained robust in 2016. The behavior of BBVA’s LtSCD in each LMU reflects that the funding structure remained robust in 2016, in the sense that all the LMUs maintained levels of self-funding with stable customer funds which were higher than the required levels.

The second core element in liquidity and funding risk management is to seek to achieve proper diversification of the funding structure, avoiding excessive reliance on short-term funding and establishing a maximum level of short-term borrowing comprising both wholesale funding as well as less stable funds from non-retail customers. Regarding long-term funding, its maturity profile does not show significant concentrations, which contributes to the adaptation of the anticipated securities issuance schedule to financial conditions of the markets. Moreover, concentration risk is monitored at the LMU level, with a view to ensuring the right diversification both by counterparty and by instrument type.

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The third element promotes the short-term resilience of the liquidity risk profile, making sure that each LMU has sufficient collateral to address the risk of wholesale markets closing. “Basic Capacity” is the short-term liquidity risk management and control metric that is defined as the relationship between the available explicit assets and the maturities of wholesale liabilities and volatile funds, at different terms, with special relevance being given to 30-day maturities.

Our principal source of funds is our customer deposit base, which consists primarily of demand, savings and time deposits. In addition to relying on our customer deposits, we also access the interbank market (overnight and time deposits) and domestic and international capital markets for our additional liquidity requirements. To access the capital markets, we have in place a series of domestic and international programs for the issuance of commercial paper and medium- and long-term debt. Another source of liquidity is our generation of cash flow from our operations. Finally, we supplement our funding requirements with borrowings from the Bank of Spain and from the ECB or the respective central banks of the countries where our subsidiaries are located. See Note 9 to the Consolidated Financial Statements for information on our borrowings from central banks.

The following table shows the balances as of December 31, 2016, 2015 and 2014 of our principal sources of funds (including accrued interest, hedge transactions and issue expenses):

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Deposits from central banks		34,740		40,087		28,193
Deposits from credit institutions		63,501		68,543		65,168
Customer deposits		401,465		403,362		319,334
Debt certificates and subordinated liabilities		76,375		81,980		71,917
Other financial liabilities		13,129		12,141		7,288
Total		589,210		606,113		491,900

Customer deposits

Customer deposits amounted to €401,465 million as of December 31, 2016, compared with €403,362 million as of December 31, 2015 and €319,334 million as of December 31, 2014.

Our customer deposits, excluding assets sold under repurchase agreements, amounted to €387,974 million as of December 31, 2016 compared with €380,094 million as of December 31, 2015 and €294,717 million as of December 31, 2014.

Amounts due to credit institutions

Amounts due to credit institutions, including central banks, amounted to €98,241 million as of December 31, 2016, compared with €108,630 million as of December 31, 2015 and €93,361 million as of December 31, 2014. The decrease as of December 31, 2016 compared with December 31, 2015, was mainly attributable to the lower volume of deposits from central banks.

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Deposits from credit institutions		63,501		68,543		65,168
Deposits from central banks		34,740		40,087		28,193
Total Deposits from credit institutions		98,241		108,630		93,361

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Capital markets

We make debt issuances in the domestic and international capital markets in order to finance our activities and as of December 31, 2016 we had €59,390 million of senior debt outstanding, comprising €58,173 million in bonds and debentures and €1,217 million in promissory notes and other securities, compared with €66,165 million, €65,517 million and €648 million outstanding as of December 31, 2015, respectively (€58,096 million, €57,026 million and €1,070 million outstanding, respectively, as of December 31, 2014). See Note 22.3 to the Consolidated Financial Statements.

In addition, we had a total of €15,718 million in subordinated debt and €987 million in preferred securities outstanding as of December 31, 2016, compared with €14,609 million and €974 million outstanding as of December 31, 2015, respectively.

The breakdown of the outstanding subordinated debt and preferred securities by entity issuer, maturity, interest rate and currency is disclosed in Appendix VI of the Consolidated Financial Statements.

The following is a breakdown as of December 31, 2016 of the maturities of our debt certificates (including bonds) from credit institutions and subordinated liabilities, disregarding any valuation adjustments and accrued interest (regulatory equity instruments have been classified according to their contractual maturity):

	Demand		Up to 1 Month		1 to 3 Months		3 to 12 Months		1 to 5 Years		Over 5 Years		Total
	(In Millions of Euros)
Debt certificates (including bonds)		189		6,197		980		8,681		25,278		16,258		57,582
Subordinated liabilities		104		—		78		109		4,145		12,270		16,706
Total		292		6,197		1,058		8,790		29,423		28,528		74,288

Generation of Cash Flow

We operate in Spain, Mexico, Turkey, the United States and over 30 other countries, mainly in Europe, Latin America, and Asia. Our banking subsidiaries around the world, including BBVA Compass, are subject to supervision and regulation by a variety of regulatory bodies relating to, among other things, the satisfaction of minimum capital requirements. The obligation to satisfy such capital requirements may affect the ability of our banking subsidiaries, including BBVA Compass, to transfer funds to us in the form of cash dividends, loans or advances. In addition, under the laws of the various jurisdictions where our subsidiaries, including BBVA Compass, are incorporated, dividends may only be paid out of funds legally available. For example, BBVA Compass is incorporated in Alabama and under Alabama law it is not able to pay any dividends without the prior approval of the Superintendent of Banking of Alabama if the dividend would exceed the total net earnings for the year combined with the bank’s retained net earnings of the preceding two years.

Even where minimum capital requirements are met and funds are legally available therefor, the relevant regulator could advise against the transfer of funds to us in the form of cash dividends, loans or advances, for prudence reasons or otherwise.

There is no assurance that in the future other similar restrictions will not be adopted or that, if adopted, they will not negatively affect our liquidity. The geographic diversification of our businesses, however, may help to limit the effect on the Group of any restrictions that could be adopted in any given country.

We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.

See Note 51 of the Consolidated Financial Statements for additional information on our Consolidated Statements of Cash Flows.

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Capital

As of December 31, 2016 and 2015, equity is calculated in accordance with current regulation on minimum capital base requirements for Spanish credit institutions, both as individual entities and as consolidated groups. Such regulation dictates how to calculate their equity levels, as well as the various internal capital adequacy assessment processes they should have in place and the information they should disclose to the market.

The minimum capital base requirements established by the current regulation are calculated according to the Group’s exposure to credit and dilution risk, counterparty and liquidity risk relating to the trading portfolio, exchange-rate risk and operational risk. In addition, the Group must fulfill the risk concentration limits established in said regulation and the internal corporate governance obligations.

As a result of the most recent SREP carried out by the ECB in 2016, the Bank has been informed by the ECB that, effective from January 1, 2017, it is required to maintain (i) a CET1 phased-in capital ratio of 7.625% (on a consolidated basis) and 7.25% (on an individual basis); and (ii) a phased-in total capital ratio of 11.125% (on a consolidated basis) and 10.75% (on an individual basis). This phased-in total capital ratio of 11.125% on a consolidated basis includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%); (ii) the “Pillar 1” Additional Tier 1 capital requirement (1.5%); (iii) the “Pillar 1” Tier 2 capital requirement (2.0%); (iv) the additional CET1 capital requirement under “Pillar 2” (1.5%); (v) the capital conservation buffer (1.25% CET1); and (vi) the D-SIBs buffer (0.375% CET1).

Since BBVA has been excluded from the list of global systemically important financial institutions in 2016, the G-SIB buffer will not apply to BBVA in 2017. However, the FSB or the supervisor may include BBVA on such list (which is updated every year) in the future.

The Bank of Spain announced on November 7, 2016 that the Bank will continue to be considered a D-SIB, and consequently the Bank will be required to maintain during 2017 a D-SIB buffer of a CET1 capital ratio of 0.75% on a consolidated basis. The D-SIB buffer is being phased-in from January 1, 2016 to January 1, 2019, with the result that the D-SIB buffer applicable to the Bank for 2017 is a CET1 capital ratio of 0.375% on a consolidated basis.

The CET1 requirement on phased-in terms stands at 7.625% on a consolidated basis and 7.25% on an individual basis.

Our consolidated ratios as of December 31, 2016 and December 31, 2015 were as follows:

	As of December 31, 2016			As of December 31, 2015			% Change
	(In Millions of Euros)
Ordinary TIER 1 Capital		54,339			54,829			(0.89	)
Adjustments		(6,969	)		(6,275	)		11.1
Mandatory convertible bonds		—			—			—
CORE CAPITAL (a)		47,370			48,554			(2.4	)
Preferred securities		6,496			5,302			22.5
Adjustments		(3,783	)		(5,302	)		(28.6	)
CAPITAL (TIER I) (b)		50,083			48,554			3.1
OTHER ELIGIBLE CAPITAL (TIER II) (c)		8,810			11,646			(24.3	)
CAPITAL BASE (TIER I + TIER II) (d)		58,893			60,200			(2.2	)
Minimum capital requirement (BIS III Regulations)		31,116			32,102			(3.1	)
CAPITAL SURPLUS		27,777			28,097			(1.1	)
RISK WEIGHTED ASSETS (RWA) (e)		388,951			401,285			(3.1	)
BIS RATIO (d)/(e)		15.14	%		15.00	%
CORE CAPITAL (a)/(e)		12.18	%		12.10	%
TIER I (b)/(e)		12.88	%		12.10	%
TIER II (c)/(e)		2.27	%		2.90	%

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Variations in the amount of Tier 1 Common Equity in the above table were mainly explained by the organic generation of capital leaning against the recurrence of the results, net of dividends paid and remunerations, and the efficient management and allocation of capital in line with the strategic objectives of the Group. The increase was partially offset by the impact of the regulatory phase-in calendar in connection with minority interests and deductions (60% in 2016 compared with 40% in 2015).

During 2016, the BBVA Group obtained the additional Tier 1 capital recommended by the regulator (1.5% of RWAs) with the issuance of perpetual securities convertible into shares, classified as additional Tier 1 equity instruments (contingent convertible securities) under the solvency rules and contributing to a Tier 1 ratio of 12.88%.

The decrease in minimum capital requirements was mainly due to the aforementioned new prudential capital requirements applicable to BBVA.

As of December 31, 2016, the Bank’s phased-in total capital ratio was 15.14% on a consolidated basis and 21.83% on an individual basis. As of December 31, 2016, the Bank’s CET1 phased-in capital ratio was 12.18% on a consolidated basis and 17.56% on an individual basis.

C. Research and Development, Patents and Licenses, etc.

In 2016, we continued to foster the use of new technologies as a key component of our global development strategy. We explored new business and growth opportunities, focusing on three major areas: emerging technologies; digital banking; and data driven initiatives, in each case with the customer as the focal point of our banking business.

The BBVA Group is not materially dependent on the issuance of patents, licenses and industrial, mercantile or financial contracts or on new manufacturing processes in carrying out its business purpose.

D. Trend Information

The European financial services sector is expected to remain competitive in the current challenging environment. Further consolidation in the sector through mergers, acquisitions or alliances, might be possible. Some banks have exited some lines of their non-core businesses and activities.

There are four main trends that are expected to shape the sector profitability in the future: the slow economic recovery, the low (or even negative) interest rate environment, the surge of alternative finance providers and the completion and the implementation of the already existing financial regulatory reforms. At the same time there are new and evolving risks, such as market based and asset management activities, misconduct risks and the decline of correspondent banking, among others.

For a discussion on the slow economic recovery trend, see “—Operating Results—Factors Affecting the Comparability of our Results of Operations and Financial Condition—Operating Environment”. Regarding the second trend, the impact of the ultra-expansionary monetary policy is already notably significant in the sector’s results, where the reductions of credit interest rates cannot be compensated by a similar contraction of the deposit rates as customers are not accustomed to negative deposit rates and that funding source is crucial for banks. This is particularly important in a country like Spain, where mortgages account for a significant proportion of credit (more than 40%) and nine out of 10 mortgages are estimated to be on variable rates. Further, alternative finance providers are growing very fast in line with technological advances and becoming a very important competitor for the banking industry (see also “Item 4. Information on the Company—Competition”). These entities, which form part of the shadow banking sector, do not have to comply with a regulation scheme as strict as that applicable to banks. Finally, regarding the fourth trend, it is likely that, in the framework of the banking union and in the inception of the capital

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markets union, regulatory changes and enhanced institutional architecture might contribute to a more competitive and less fragmented landscape. Having said that, a comprehensive analysis and understanding of the already implemented regulatory changes would be needed before the introduction of new measures.

There are still some challenges to be addressed, such as the banking conduct and culture and their implications on consumer and investor protection issues. An ethical behavior is of the utmost importance for the banking business to recover the trust that was lost during the last financial crisis. It is a discernible hallmark that allows agents a better formation of their expectations in those fields where the activity is not regulated or supervised. As such, banking conduct and culture are achieving higher relevance.

In that vein, business activities have to be based on a prudent and an anticipatory management approach with a customer-focus approach; that is, with customers at the core of all of the activities performed. Indeed, personal and professional integrity and competence is inherent to the way of understanding and conducting all of BBVA’s activities to bring the age of opportunity to everyone.

Financial stability and consumer protection are the final goals of the global financial regulatory reform that started eight years ago. However, if such reform is applied locally, inconsistently and heterogeneously, it can lead to divergences, regulatory inconsistencies and regulatory arbitrages with unintended consequences. In addition to that, the lack of homogeneity at the European level makes it difficult for investors to evaluate financial institutions and often impose additional burdens on financial institutions. This could reduce the potential synergies for the Group, as it might not be allowed to sell the same products across all the jurisdictions in which it carries out its activities.

Regarding consumer protection rules, the European Commission proposed on February 10, 2016 the application of the revised Markets in Financial Instruments Directive (MiFID II) of the European Parliament and of the European Council be delayed by one year until January 3, 2018. Six days later, the European Parliament also proposed the deferral of its transposition into national legislation for one year, until July 3, 2017. This decision responded to concerns expressed by the European Securities and Markets Authority (the “ESMA”) regarding the fact that neither the competent authorities, nor market participants, would have the necessary information technology systems ready in time for earlier implementation.

Broadly, MiFID II goals are fostering investor protection, enhancing market transparency and competition and improving corporate governance and compliance, all at the same time. It represents a significant overhaul of MiFID -that came into force in 2007- and will have a significant impact in European markets. It represents a significant effort in terms of costs for regulators, supervisors and financial entities to adapt their systems to the new requirements.

For fostering investor protection, MiFID II establishes (i) stricter requirements for product design, distribution and follow-up; (ii) tougher conditions for the provision of independent services; (iii) the prohibition, subject to certain exceptions, of any remuneration, discount or non-monetary benefit in exchange for advisory services, including research and (iv) a detailed cost disclosure.

The greater pre-trade transparency in markets might result in narrower margins due to a compression of spreads and in a change of paradigm in the competitive landscape. In addition, the higher post-trade transparency may have unintended consequences as a result of the availability of public information related to transactions closed on book positions.

MiFID II requirements also focus on the responsibilities of the management board in product governance issues that, in broad terms, consists in narrowing the target market and clients for each product to be sold, reviewing distribution contracts and flows of information between manufacturers and distributors and strengthening the procedures and mechanisms to adequately track the product during its whole life cycle and on the requirements and functions for regulatory compliance.

Another key regulation for consumer protection in Europe is the Packaged Retail and Insurance-based Investment Products (“PRIIPs”). The original proposal from the European Commission was released on July 3, 2012 and the regulation on Key Information Documents (“KIDs”) for PRIIPS was passed and published in the Official Journal of the EU on November 26, 2014 and was expected to become effective on January 1, 2017.

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However, the Commission decided to extend by one year the implementation of the PRIIPS regulation in order to assure a smooth implementation for European consumers and ensure legal certainty for the sector.

The PRIIPs regulation aims at increasing transparency and comparability among investment products. As such, financial institutions have to provide consumers with the necessary information to make their investment decisions with a clear understanding of all the risks, costs and scenarios involved. The European Supervisory Authorities (“ESAs”), which include the EBA, the ESMA and the European Insurance and Occupational Pensions Authority) launched a Joint Consultation Paper on November 10, 2015 with the proposed Regulatory Technical Standards (RTS) that define the Level 2 requirements of the PRIIPs Regulation, including both presentation and content of the KIDs. On June 30, 2016 the Commission adopted a delegated act setting the RTS specifying the content and underlying methodology of the KIDs. However, on September 14, 2016 the European Parliament voted down the delegated act and called for certain modifications. An amended version of the draft regulatory technical standard is to be submitted by the ESAs and approved by the European Parliament such that the revised PRIIPs framework can be in place during the first half of 2017 and apply as of January 1, 2018.

We consider that MiFID II and PRIIPs should converge whenever possible to avoid regulatory inconsistencies and duplicities that may confuse consumers and reduce their protection instead of increasing it. Furthermore, having both regimes entail additional costs for financial institutions.

Furthermore, there are other challenges to be mentioned, such as the VAT regime applicable to banks. The VAT regime applicable to banks is part of the trend of increasing pressure on financial systems. Within the Euro Area, several countries are imposing new taxes on the financial industry, such as bank levies, financial activity taxes or FTT. In addition, there is an agreement to introduce a FTT at the European Union level. Such proposal was made by the European Commission for introducing a tax within eleven Member States of the European Union. The introduction of such tax was initially expected by January 1, 2014 but it was later postponed to January 1, 2016, then to mid-2016 and has now stalled because it lost the support of one Member State.

Differing tax regimes could set incentives for banks to operate, or transactions to take place, in those geographies where the tax pressure is lower. The implementation of new regulations in countries where we operate which results in increased tax pressure could have a material impact on our profitability.

Regarding the banking structural reforms, the European Commission released a proposal in January 2014. The proposal is twofold and imposes a prohibition on proprietary trading and an annual supervisory examination of trading activities that may trigger the separation of market-making, complex derivatives and risky securitization if the thresholds on a certain number of metrics are breached (a wider separation is possible under supervisory discretion). The European Council reached an agreement on this matter in June 2015. Its position includes important changes to the original EC’s proposal. It softens the latter by introducing the mandatory separation of proprietary trading instead of its prohibition. On the other hand, the European Parliament failed to agree a common position in May 2015. Negotiations within the European Parliament have stalled for now.

The Bank Recovery and Resolution Directive (BRRD) is binding since January 2015, and the bail-in tool since 2016. The BRRD sets a common framework for all EU countries with the intention to pre-empt bank crises and resolve financial institutions in an orderly manner in the event of failure, whilst preserving essential bank operations and minimizing taxpayers’ costs, thus helping to restore confidence in Europe’s financial sector. The bail-in tool implies that banks’ creditors will be written down or converted into equity in a resolution scenario, and that they should afford much of the burden to help recapitalize a failed bank instead of the taxpayers. For that to be effective, the BRRD requires banks to have enough liabilities that could be eligible to bail-in – the Minimum Required Eligible Liabilities (MREL). Despite the impact on banks’ liability structure, we believe the introduction of the bail-in tool and the MREL enhances banks’ fundamentals, encourages positive discrimination between issuers, breaks down the sovereign-banking link and increases market discipline.

The SRB set undisclosed banks’ target of MREL in the third quarter of 2016. The European Commission issued a comprehensive legislative proposal on November 23, 2016 known as the CRD5, so as to modify, among other issues, MREL and introduce TLAC requirement for G-SIBs into European legislation. The EBA reviewed the implementation of MREL in December 2016.

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The CRD5 is aimed at amending both the current banking prudential and resolution frameworks. The revision includes the implementation of several international standards into EU law (some regulatory pieces adopted by the Basel Committee after 2010 and the TLAC standard) and the introduction of a package of technical improvements. In parallel, a legislative proposal to harmonize creditor hierarchy of senior debt across the EU has also been released. The publication of these proposals is only the first step in the legislative process of the European Union. A negotiation period of approximately one year is expected before a final text is agreed and regulatory implementation standards are developed.

As a result, there are still many doubts regarding the final MREL design in Europe.

E. Off-Balance Sheet Arrangements

In addition to loans, we had outstanding the following amounts of our off-balance sheet arrangements as of the dates indicated:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Bank guarantees		39,722		39,971		28,297
Letters of credit		10,210		9,367		5,397
Total financial guarantees given		49,932		49,338		33,694

In addition to the off-balance sheet arrangements described above, the following tables provide information regarding commitments to extend credit and assets under management as of December 31, 2016, 2015 and 2014:

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Credit institutions		859		921		1,057
Government and other government agencies		3,110		2,570		1,359
Other resident sectors		28,323		27,334		21,784
Non-resident sector		74,961		92,795		72,514
Total Contingent Liabilities		107,253		123,620		96,714
Total Contingent Risks and Contingent Liabilities		157,185		172,958		130,408

	As of December 31,
	2016		2015		2014
	(In Millions of Euros)
Mutual funds		55,037		54,419		52,782
Pension funds		33,418		31,542		27,364
Customer portfolios		40,805		42,074		35,129
Total assets under management		129,260		128,035		115,275

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See Note 36 to the Consolidated Financial Statements for additional information with respect to our off-balance sheet arrangements.

F. Tabular Disclosure of Contractual Obligations

Our consolidated contractual obligations as of December 31, 2016 based on when they are due, were as follows:

	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
	(In Millions of Euros)
Senior debt		16,046		20,649		4,629		16,258		57,582
Subordinated debt		291		1,329		2,817		12,270		16,706
Deposits from customers		363,533		20,174		2,035		14,779		400,521
Capital lease obligations		—		—		—		—		—
Operating lease obligations		263		305		321		2,397		3,286
Purchase obligations		23		—		—		—		23
Post-employment benefits (1)		941		1,619		1,292		2,102		5,954
Insurance commitments (2)		1,705		1,214		1,482		4,738		9,139
Total (3)		382,802		45,290		12,576		52,544		493,212

⁽¹⁾ Represents the Group’s estimated aggregate amounts for pension commitments in defined-benefit plans and other post-employment commitments (such as early retirement and welfare benefits), based on certain actuarial assumptions. Post-employment benefits are detailed in Note 25 to the Consolidated Financial Statements.

⁽²⁾ Liabilities under insurance and reinsurance contracts

⁽³⁾  Interest to be paid is not included (see Note 22 to the Consolidated Financial Statements). The majority of the senior and subordinated debt was issued at variable rates. The financial cost of such issuances for 2016, 2015 and 2014 is detailed in Note 37.2 to the Consolidated Financial Statements.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Our Board of Directors is committed to a good corporate governance system in the design and operation of our corporate bodies in the best interests of the Company and our shareholders.

Our Board of Directors is subject to Board Regulations that reflect and implement the principles and elements of BBVA’s concept of corporate governance. These Board Regulations comprise standards for the internal management and operation of the Board and its Committees, as well as the rights and obligations of directors in the performance of their duties, which are contained in the directors’ charter.

General shareholders’ meetings are subject to their own set of regulations on issues such as how they operate and what rights shareholders enjoy regarding such meetings. These establish the possibility of exercising or delegating votes over remote communication media.

Our Board of Directors has approved a report on corporate governance and a report on directors’ remuneration for 2016, according to the forms set forth under Spanish regulation for listed companies.

Shareholders and investors may find the documents referred to above on our website (www.bbva.com).

Our website was created as an instrument to facilitate information and communication with shareholders. It provides special direct access to all information considered relevant to BBVA’s corporate governance system in a user-friendly manner. In addition, all the information required by article 539 of the Corporate Enterprises Act can be accessed on BBVA’s website (www.bbva.com).

A. Directors and Senior Management

We are managed by a Board of Directors that currently has 14 members.

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Pursuant to article 1 of the Board Regulations, Bank directorships may be executive or non-executive. Executive directors are those who perform management functions in the Company or its Group entities, regardless of the legal relationship they have with such companies. All other Board members will be considered non-executives and they may be proprietary, independent or other external directors.

Independent directors are those non-executive directors who have been appointed in view of their personal and professional background who can perform their duties without being constrained by their relations with the Company or its Group, its significant shareholders or its executives. Under the Board Regulations, directors cannot be deemed independent if they:

(a) have been employees or executive directors in Group companies, unless three or five years have elapsed, respectively since they ceased as employees or executive directors, as the case may be;

(b) receive from the Company or its Group entities, any amount or benefit for an item other than remuneration for their directorship, except where the sum is insignificant. This does not include either dividends or pension supplements that a director may receive due to a former professional or employment relationship, provided these are unconditional and, consequently, the company paying them may not at its own discretion, suspend, amend or revoke their accrual unless there has been a breach of duty;

(c) are partners of the external auditor or in charge of the audit report or have been so in the last three years, whether the audit in question was carried out on the Company or any other Group entity;

(d) are executive directors or senior managers of another company in which a Company’s executive director or senior manager is an external director;

(e) maintain any significant business relationship with the Company or with any Group company or have done so over the last year, either in their own name or as a significant shareholder, director or senior manager of a company that maintains or has maintained such a relationship. Business relationship here means any relationship as supplier of goods or services, including financial goods or services, and as advisor or consultant;

(f) are significant shareholders, executive directors or senior managers of any entity that receives, or has received over the last three years, donations from the Company or its Group. Those persons who are merely trustees in a foundation receiving donations shall not be deemed to be included under this letter;

(g) are spouses, or spousal equivalents or related up to second degree of kinship to an executive director or senior manager of the Company;

(h) have not been proposed by the Appointments Committee for appointment or renewal;

(i) have held a directorship for a continuous period of more than 12 years; or

(j) are related to any significant shareholder or shareholder represented on the Board of Directors under any of the circumstances described under letters (a), (e), (f) or (g) above. In the event of kinship relationships mentioned in letter (g), the limitation will apply not only with respect to the shareholder, but also with respect to their proprietary directors in the company in which the shareholder holds an interest.

Directors who hold shares in the Bank may be considered independent provided they comply with the above conditions and their shareholding is not legally considered to be significant.

Regulations of the Board of Directors

The principles and elements comprising our corporate governance are set forth in our Board Regulations, which govern the internal procedures and the operation of the Board and its Committees and directors’ rights and duties as described in their charter.

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The full text of the Board Regulations can be found on the Bank’s corporate website (www.bbva.com).

The following provides a brief description of several significant matters covered in the Regulations of the Board of Directors.

Appointment and Re-election of Directors

The proposals that the Board submits to the Company’s general shareholders’ meeting for the appointment or re-election of directors and the appointments the Board makes directly to cover vacancies, exercising its powers of co-option will be approved at the proposal of the Appointments Committee in the case of independent directors, and following a report from said Committee for all other directors.

In all such cases the proposal must be accompanied by a report of the Board explaining the grounds on which the Board of Directors has assessed the competence, experience and merits of the candidate proposed, which will be attached to the minutes of the general shareholders’ meeting or of the Board of Directors.

To such end, the Appointments Committee will evaluate the balance of skills, knowledge and expertise on the Board of Directors, as well as the conditions that candidates should display to fill the vacancies arising, assessing the dedication necessary to be able to suitably perform their duties in view of the needs that the Company’s governing bodies may have at any time.

Term of Directorships and Director Age Limit

Directors will stay in office for the term set out in our Bylaws (three years). If they have been co-opted, they will stay in office until the first general shareholders’ meeting is held. The general shareholders’ meeting may then ratify their appointment for the term of office established under our Bylaws.

BBVA’s Board of Directors Regulations establishes an age limit for sitting on the Bank’s Board. Directors must present their resignation at the first meeting of the Bank’s Board of Directors to be held after the general shareholders’ meeting that approves the accounts for the year in which they reach the age of seventy-five years.

Evaluation

Article 17 of the Board Regulations indicates that the Board of Directors will assess the quality and efficiency of the Board’s operation and will assess the performance of the duties of the Chairman of the Board (process which will be directed by the Lead Director). Such assessment will always begin with the report submitted by the Appointments Committee. Likewise, the Board will carry out the evaluation of the operation of its Committees, on the basis of the report that each Committee submits to the Board of Directors.

Moreover, article 5 of the Board Regulations establishes that the Chairman, who is responsible for the efficient running of the Board of Directors, will organize and coordinate the periodic assessment of the Board’s performance with the Chairs of the relevant Committees. Pursuant to the provisions of the Board Regulations, as in previous years, in 2016 the Board of Directors assessed the quality and efficiency of its own operation and of its Committees, as well as the performance of the duties of the Chairman both as Chairman of the Board and as first executive of the Bank.

Performance of Directors’ Duties

Directors must comply with their duties as defined by legislation and by our Bylaws in a manner that is faithful to the interests of the Company.

They will participate in the deliberations, discussions and debates on matters submitted for their consideration, expressing their opposition when they consider that a draft resolution submitted to the Board may be contrary to the Company’s interests and will be appraised of the necessary information to be able to form their own opinions regarding questions corresponding to our corporate bodies. They may request any additional information and advice they require to comply with their duties. They must devote to their duties the time and effort which is necessary to perform them efficiently and they are obliged to attend the meetings of corporate bodies and of the Board Committees on which they sit, unless they can justify the reason for their absence.

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The directors may also request the Board of Directors for assistance from external experts on matters subject to their consideration whose special complexity or importance so requires.

Conflicts of Interest

The rules comprising the BBVA directors’ charter detail different situations in which conflicts of interest could arise between directors, their family members and/or organizations with which they are linked, and the BBVA Group. They set out procedures for such cases, in order to avoid conduct contrary to our best interests. The rules contained in the BBVA Board of Directors’ charter are in line with the specific regulation established on the Spanish Corporate Enterprises Act.

These rules help ensure directors’ conduct reflects stringent ethical codes, in keeping with applicable standards and according to core values of the BBVA Group.

Incompatibilities

Directors are also subject to the rules on limitations and incompatibilities established under the applicable regulations at any time and, in particular, to the provisions of Spanish Law 10/2014 and Circular 2/2016, of the Bank of Spain, for credit institutions on supervision and solvency. A director of BBVA may not be a director in companies in which the Group or any of the Group companies hold a stake, subject to the exceptions set forth below. Non-executive directors may hold a directorship in the Bank’s associated companies or in any other Group company provided the directorship is not related to the Group’s holding in such companies. As an exception and when proposed by the Bank, executive directors are able to hold directorships in companies directly or indirectly controlled by the Bank with the approval of the Executive Committee, and in other associated companies with the approval of the Board of Directors.

Directors may not provide professional services to enterprises competing with the Bank or any of the Group entities, unless they have received express prior authorization from the Board of Directors or the general shareholders’ meeting, as the case may be, or unless such services or activities were provided or performed before they became directors of the Bank, they do not involve effective competition with the Bank and they were reported to the Bank at the time of appointment.

Directors’ Resignation and Dismissal

Furthermore, in the following circumstances, reflected in the Board Regulations, directors must place their office at the disposal of the Board of Directors and accept its decision regarding their continuity or non-continuity in office. Should the Board resolve they do not continue in office, they will be obliged to tender their resignation:

• when they are affected by circumstances of incompatibility or prohibition as defined under prevailing legislation, in our Bylaws or in the Board Regulations;

• when significant changes occur in their professional or personal situation that may affect the condition by virtue of which they were appointed to the Board of Directors;

• when they are in serious dereliction of their duties as directors;

• when for reasons attributable to the director in his or her condition as such, serious damage has been done to the Company’s net worth, credit or reputation; or

• when they lose their suitability to hold the position of director of the Bank.

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The Board of Directors

Our Board of Directors is currently comprised of 14 members.

The following table sets forth the names of the members of the Board of Directors as of that date of this Annual Report on Form 20-F, their date of appointment and, if applicable, re-election, their current positions and their present principal outside occupation and employment history.

Name	Birth Year	Current Position	Date Nominated	Date Re-elected	Present Principal Outside Occupation and Employment History(*)
Francisco González Rodríguez(1)	1944	Group Executive Chairman	January 28, 2000	March 11, 2016	Group Executive Chairman of BBVA since January 2000; Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer.
Carlos Torres Vila (1) (6)	1966	Chief Executive Officer	May 4, 2015	March 11, 2016	Chief Executive Officer of BBVA since May 2015. Chairman of the Technology and Cybersecurity Committee. Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer. He started at BBVA on September 2008 holding senior management posts such as Head of Digital Banking from March 2014 to May 2015 and BBVA Strategy & Corporate Development Director from January 2009 to March 2014.
Tomás Alfaro Drake(2)(3)(6)	1951	Independent Director	March 18, 2006	March 17, 2017	Chairman of the Appointments Committee of BBVA since May 25, 2010. Director of Internal Development and Professor in the Finance department of Universidad Francisco de Vitoria.
José Miguel Andrés Torrecillas (2) (3) (5) (7)	1955	Independent Director	March 13, 2015	Not applicable	Chairman of the Audit and Compliance Committee of BBVA. Chairman of Ernst & Young Spain from 2004 to 2014, where he was a partner since 1987 and also held a series of senior offices, including Director of the Banking Group from 1989 to 2004 and Managing Director of the Audit and Advisory practices at Ernst & Young Italy and Portugal from 2008 to 2013.
José Antonio Fernández Rivero(1)(4)	1949	External Director	February 28, 2004	March 13, 2015	Was appointed Group General Manager until January 2003. Has been the director representing BBVA on the Boards of Telefónica, Iberdrola and Banco de Crédito Local and Chairman of Adquira.
Belén Garijo López(2) (4)	1960	Independent Director	March 16, 2012	March 13, 2015	Member of the Executive Board of Merck Group and CEO of Merck Healthcare, member of the Board of Directors of L’Oréal and Chair of the International Executive Committee of PhRMA, ISEC (Pharmaceutical Research and Manufacturers of America).

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Name	Birth Year	Current Position	Date Nominated	Date Re-elected	Present Principal Outside Occupation and Employment History(*)
José Manuel González-Páramo Martínez-Murillo	1958	Executive Director	May 29, 2013	March 17, 2017	Executive Director of BBVA since May 29, 2013. Member of the European Central Bank (ECB) Governing Council and Executive Committee from 2004 to 2012. Chairman of European DataWarehouse GmbH. Head of BBVA’s Global Economics, Regulation and Public Affairs.
Sunir Kumar Kapoor (6)	1963	Independent Director	March 11, 2016	Not applicable	President and CEO of UBmatrix Inc from 2005 to 2011. Executive Vice President and CMO of Cassatt Corporation from 2004 to 2005. Oracle Corporation, Vice President Collaboration Suite from 2002 to 2004. Founder and CEO of Tsola Inc from 1999 to 2001. President and CEO of E-Stamp Corporation from 1996 to 1999. Vice President of Strategy, Marketing and Planning of Oracle Corporation from 1994 to 1996. Currently, he is an independent consultant to various leading companies in the technology sector, such as cloud infrastructures or data analysis.
Carlos Loring Martínez de Irujo(1)(5)	1947	External Director	February 28, 2004	March 17, 2017	Was Partner of J&A Garrigues from 1977 to 2004, where he has also held a series of senior offices, including Director of M&A Department, Director of Banking and Capital Markets Department and member of its Management Committee.
Lourdes Máiz Carro (2) (3)	1959	Independent Director	March 14, 2014	March 17, 2017	Was Secretary of the Board of Directors and Director of Legal Services at Iberia, Líneas Aéreas de España from 2001 until 2016. Joined the Spanish State Counsel Corps (Cuerpo de Abogados del Estado) and from 1992 until 1993 she was Deputy to the Director in the Ministry of Public Administration. From 1993 to 2001 held various senior positions in the Public Administration.
José Maldonado Ramos(1)(3)	1952	External Director	January 28, 2000	March 13, 2015	Was appointed Director and General Secretary of BBVA in January 2000. Took early retirement as Bank executive in December 2009.
Juan Pi Llorens (2)(4)(6)	1950	Independent Director	July 27, 2011	March 13, 2015	Chairman of the Remuneration Committee since March 31, 2016. Had a professional career at IBM holding various senior posts at a national and international level including Vice President for Sales at IBM Europe, Vice President of Technology & Systems Group at IBM Europe and Vice President of the Finance Services Sector at GMU (Growth Markets Units) in China. He was executive President of IBM Spain.
Susana Rodríguez Vidarte(1)(3)(5)	1955	External Director	May 28, 2002	March 17, 2017	Professor of Strategy at the Faculty of Economics and Business Sciences at Universidad de Deusto. Doctor in Economic and Business Sciences from Universidad de Deusto.

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Name	Birth Year	Current Position	Date Nominated	Date Re-elected	Present Principal Outside Occupation and Employment History(*)
James Andrew Stott (4) (5) (6)	1953	Independent Director	March 11, 2016	Not applicable	Chairman of the Risk Committee since March 31, 2016. Chairman of the Innovation Board, Business Innovation Consulting Group from 2011 to 2015. Independent director and member of the Audit Committee of Catenon from 2011 to 2015. Independent director and Chairman of the Risks and Audit Committee of Barclays Bank España from 2011 to 2014. Partner and General Manager, and other senior posts at Oliver Wyman Financial Services from 1994 to 2010.

(*) Where no date is provided, the position is currently held.

(1) Member of the Executive Committee.

(2) Member of the Audit and Compliance Committee.

(3) Member of the Appointments Committee.

(4) Member of the Remuneration Committee.

(5) Member of the Risk Committee.

(6) Member of the Technology and Cybersecurity Committee.

(7) Lead Director.

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Senior Management

Our senior managers were each appointed for an indefinite term. Their positions as of the date of this Annual Report on Form 20-F are as follows:

Name(*)	Current Position	Present Principal Outside Occupation and Employment History(**)
Francisco González Rodríguez	Group Executive Chairman	Executive Chairman of BBVA since January 2000; Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer.
Carlos Torres Vila	Chief Executive Officer	Chief Executive Officer of BBVA since May 2015. Chairman of the Technology and Cybersecurity Committee. Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer. He started at BBVA on September 2008 holding senior management posts such as Head of Digital Banking from March 2014 to May 2015 and BBVA Strategy & Corporate Development Director from January 2009 to March 2014.
José Manuel González-Páramo Martínez-Murillo	Head of Global Economics, Regulation & Public Affairs	Executive Director of BBVA since May 29, 2013, and Head of BBVA’s Global Economics, Regulation and Public Affairs. Member of the ECB’s Governing Council and Executive Committee from 2004 to 2012. Chairman of European DataWarehouse GmbH.
Eduardo Arbizu Lostao	Head of Legal & Compliance	Head of Legal department of BBVA since 2002; Managing Director of Barclays Retail Operations in Continental Europe (France, Spain, Portugal, Italy and Greece) from 1997 to 2002.
Domingo Armengol Calvo	General Secretary	General Secretary of BBVA since 2009. Deputy Secretary of the Board from 2005 to 2009 and Head of the Institutional Legal Department of BBVA from 2000 to 2005.
Juan Asúa Madariaga	Head of Corporate & Investment Banking	Head of Corporate & Investment Banking in BBVA. Head of Spain and Portugal in BBVA from 2007 to 2012. Head of Corporate and Middle cap companies of Spain and Portugal in BBVA from 2006 to 2007.
Ricardo Forcano García	Head of Talent & Culture	Head of Talent & Culture since July 2016. Previously, he held other posts at BBVA such as Head of Business Development Growth Markets from 2015 to 2016 and Head of New Business Models from 2011 to 2012. Prior to joining BBVA he was Deputy Director of Corporate Strategy of Endesa from 2003 to 2007.
Ricardo Gómez Barredo	Head of Accounting & Supervisors	Head of Accounting & Supervisors since July 2016. Head of Global Accounting and Information Management from 2011 to 2016 and Head of Financial Planning Management Control of BBVA’s Group from 2006 to 2011.
Ricardo Enrique Moreno García	Head of Engineering	Head of Engineering since May 2015. Previously he was country manager of BBVA in Argentina.

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Name(*)	Current Position	Present Principal Outside Occupation and Employment History(**)
Eduardo Osuna Osuna	Mexico Country Manager	Mexico Country Manager since May 2015 and General Manager of BBVA Bancomer. Previously he was Head of Institutional Banking of BBVA Bancomer.
Cristina de Parias Halcón	Spain Country Manager	Spain Country Manager since March 2014. Head of the Central Area in Spain from 2011 to 2014. She joined BBVA in 1998 and has held positions in digital business development, payment systems, Uno-e and consumer finance from 1998 to 2011.
Francisco Javier Rodríguez Soler	Head of Strategy & M&A	Head of Strategy & M&A since May 2015. Prior to this post, he was Head of M&A and Corporate Development of BBVA from 2010 to 2015. Prior to joining BBVA in 2008, he was Head of Strategy and M&A of Endesa.
Jaime Sáenz de Tejada Pulido	Head of Finance	Head of Finance since March 2014. Head of Spain and Portugal from 2012 to 2014. Business Development Manager of Spain and Portugal at BBVA from 2010 to 2012. Central Area Manager of Madrid and Castilla La Mancha from 2007 to 2010.
Jorge Sáenz-Azcúnaga Carranza	Head of Country Monitoring	Head of Country Monitoring since July 2016. He joined BBVA in 1993 and he has held various senior posts such as Head of CEO Office from 2002 to 2005, Head of Strategy and Planning, Spain & Portugal from 2008 to 2013 and Country Networks—Head of Business Monitoring Spain, USA and Turkey from 2015 to 2016.
José Luis de los Santos Tejero	Head of Internal Audit	Head of Internal Audit since February 2002, and senior manager since May 2015. From October 1999 until December 2001 he was Deputy Director of Internal Audit and Director of Methodology and Specialized Areas. Between June 1998 and October 1999 he was Director of Internal Audit of the Argentaria Group.
Rafael Salinas Martínez de Lecea	Head of Global Risk Management	Head of Global Risk Management since May 2015. Prior to this post, he was Head of Risk Management at Corporate and Investment Banking with global responsibilities for large corporates’ credit portfolio and markets and counterparty risks.
Derek Jensen White	Head of Customer Solutions	Head of Customer Solutions since May 2016. Prior to joining BBVA he held various senior posts at Barclays such as Chief Customer Experience Officer, Global Retail & Business Banking from 2011 to 2013 and Chief Design & Digital Officer from 2013 to 2016.

(*) On March 29, 2017, David Puente Vicente was appointed to act as Head of Data and senior manager of BBVA. In accordance with applicable law, Mr. Puente will start performing the functions corresponding to such position once he receives the relevant suitability authorization from the European Central Bank.

(**) Where no date is provided, positions are currently held.

B. Compensation

The provisions of BBVA’s Bylaws that relate to compensation of directors are in accordance with the relevant provisions of Spanish law. Furthermore, BBVA has a remuneration policy for BBVA directors (the “Directors’ Remuneration Policy”) which is aligned with the specific regulations applicable to credit institutions and the best practices on the market.

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Directors’ Remuneration Policy

The Directors’ Remuneration Policy for 2015, 2016 and 2017 was approved by the general shareholders’ meeting held on March 13, 2015, by a majority of 95.41%. This policy is available at our website (www.bbva.com).

BBVA has defined its Directors’ Remuneration Policy on the basis of the general principles of BBVA Group’s remuneration policy, additionally taking into consideration the necessary compliance with legal requirements applicable to credit institutions and the alignment with best practices on the market, having incorporated elements aimed at reducing exposure to excessive risks and adjusting remuneration to the targets, values and long-term interests of the Bank.

Pursuant to this Directors’ Remuneration Policy, the system of variable remuneration for executive directors is based on a sole incentive that is assigned annually, yet combining indicators that are assessed annually with multi-year (long-term) indicators, the combination of which seeks to allow effective alignment of the remuneration of executive directors with the long-term interests of BBVA and its stakeholders.

For years 2017, 2018 y 2019, a new Directors’ Remuneration Policy has been approved by the general shareholders’ meeting, held on March 17, 2017 introducing certain changes primarily to the system of variable remuneration for executive directors. The main features of the new policy are the following:

• The deferred component of variable remuneration for executive directors has been increased to 60% of variable remuneration. Likewise, the deferral period has been increased from three to five years.

• The new Remuneration Policy includes an increase from 50% to 60% in the share-based component of deferred variable remuneration.

• New malus and clawback arrangements to variable remuneration have been included (and are summarized hereunder) for the forfeiture and clawback of variable remuneration of executive directors, in line with the criteria set forth in new regulations.

• The Chief Executive Officer’s previous defined-benefit pension scheme has been transformed into a defined-contribution scheme.

• As required by new regulations, 15% of the annual contributions agreed to executive directors’ and senior manager’s pension schemes are now considered “discretionary pension benefits”.

• Contractual conditions applicable to payments for termination of contracts have been modified. The possibility for the Chief Executive Officer to receive his retirement pension in advance has been eliminated, as has the Head of GERPA’s severance payment entitlement. Both directors are now subject to a post-contractual non-compete agreement of two years duration and amounting to two times their annual fixed remuneration.

• Executive directors shall not be allowed to use personal hedging strategies or insurance in connection with remuneration and responsibility that may undermine the effects of alignment with sound risk management. Additionally, under the new Remuneration Policy, only deferred portions in cash of variable remuneration shall be subject to updating.

• The new Remuneration Policy includes a commitment for executive directors not to transfer a number of shares equivalent to twice their annual fixed remuneration for a period of, at least, three years from the time of their vesting. The general one-year retention period applicable to all shares vested as variable remuneration is however maintained. The aforementioned holding periods shall not apply to the transfer of those shares required to honor the payment of taxes.

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• The new Remuneration Policy envisages a clearer allocation between fixed and variable components of remuneration, as well as criteria to determine these components. A change in the balance between the fixed and variable components of remuneration has been established, to better align it with applicable regulations, providing more flexibility to variable remuneration with respect to fixed remuneration. Said change in no case entails an increase in the total remuneration of beneficiaries.

• The variable component of the remuneration of executive directors for a financial year shall continue to be limited to a maximum amount of 100% of the fixed component of total remuneration, unless the general shareholders’ meeting resolves to increase this percentage up to 200%.

The changes envisaged in the new Directors’ Remuneration Policy are framed within the modification of the remuneration policy for those categories of staff whose professional activities have a significant impact on the Group’s risk profile, among which BBVA’s executive directors and senior management are included (jointly referred to as the “Identified Staff”), which has been approved by the Board of Directors, at the proposal of the Remuneration Committee.

As regards malus and clawback arrangements, the new Directors’ Remuneration Policy prescribes: that up to 100% of the annual variable remuneration of each Identified Staff member corresponding to each financial year shall be subject to malus and clawback arrangements, both linked to a downturn in financial performance of the Bank as a whole, or of a specific unit or area, or of exposures generated by an Identified Staff member, when such downturn in financial performance arises from any of the following circumstances:

a)    misconduct, fraud or serious infringement of the Code of Conduct and other applicable internal rules by an Identified Staff member;

b)    regulatory sanctions or judicial convictions due to events that could be attributed to a specific unit or to the staff responsible for such events;

c)    significant failure of risk management committed by the Bank or by a business or risk control unit, to which the willful misconduct or gross negligence of an Identified Staff member was a contributing factor; or

d)    restatement of the Bank’s annual accounts, except where such restatement is due to a change in applicable accounting legislation.

For these purposes, the Bank will compare the performance assessment carried out for the Identified Staff member with the ex post behavior of some of the criteria that contributed to achieve the targets. Both malus and clawback will apply to the annual variable remuneration of the financial year in which the event giving rise to application of the arrangement occurred, and they shall be in force during the entire period of deferral and retention applicable to the annual variable remuneration.

Notwithstanding the foregoing, in the event that these scenarios give rise to a dismissal or termination of contract of the Identified Staff member due to serious and guilty breach of duties, malus arrangements may apply to the entire deferred annual variable remuneration pending payment at the date of the dismissal or termination of contract, in light of the extent of the damage caused.

In any case, the variable remuneration is paid or vests only if it is sustainable according to the Group’s situation as a whole, and justified on the basis of the performance of the Bank, the business unit and of the Identified Staff member concerned.

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Malus and clawback arrangements will be applicable to the annual variable remuneration awarded as of the year 2016, inclusive.

The full text of the Directors’ Remuneration Policy approved by the general shareholders’ meeting is available at the Bank’s website (www.bbva.com).

Remuneration for non-executive directors received in 2016

The remuneration paid to the non-executive members of the Board of Directors during 2016 is indicated below in thousands of euros. The figures are given individually for each non-executive director and itemized:

	Board of Directors		Executive Committee		Audit and Compliance Committee		Risk Committee		Remuneration Committee		Appointments Committee		Technology and Cybersecurity Committee		Total
Tomás Alfaro Drake		129		—		71		—		11		102		25		338
José Miguel Andrés Torrecillas		129		—		179		107		—		31		—		445
José Antonio Fernández Rivero		129		125		—		53		32		10		—		350
Belén Garijo López		129		—		71		—		32		—		—		232
Sunir Kumar Kapoor (1)		107		—		—		—		—		—		25		132
Carlos Loring Martínez de Irujo		129		125		18		80		27		—		—		379
Lourdes Máiz Carro		129		—		71		—		—		31		—		231
José Maldonado Ramos		129		167		—		—		—		41		—		336
José Luis Palao García-Suelto		129		—		—		107		32		10		—		278
Juan Pi Llorens		129		—		54		27		91		—		25		325
Susana Rodríguez Vidarte		129		167		—		107		—		41		—		443
James Andrew Stott (2)		107		—		—		160		32		—		25		325
Total (3)		1,502		584		464		642		257		265		100		3,813

(1) Sunir Kumar Kapoor was appointed director by the general shareholders’ meeting held on March 11, 2016.

(2) James Andrew Stott was appointed director by the general shareholders’ meeting held on March 11, 2016.

(3) Includes the amounts received as members of the different Committees during 2016. The composition of the Committees was changed in March 31, 2016.

In addition, Ramón Bustamante y de la Mora and Ignacio Ferrero Jordi, who ceased as directors on March 11, 2016, received in 2016 the total amount of €70 thousand and €85 thousand, respectively, as members of the Board of Directors and certain Board Committees.

Moreover, during 2016, €132 thousand was paid in healthcare and casualty insurance premiums for non-executive directors.

Remuneration for executive directors received in 2016

The remuneration scheme for executive directors is in line with the general model applied to BBVA’s Senior Management. This comprises a fixed remuneration and a variable remuneration, which is based on a single incentive (hereinafter, the “Annual Variable Remuneration”).

During 2016, executive directors were paid the amount of fixed remuneration corresponding to that year and the Annual Variable Remuneration corresponding to 2015, which was paid during the first quarter of 2016, according to the settlement and payment system set out in the applicable Directors’ Remuneration Policy, as approved by the general shareholders’ meeting held on March 13, 2015, which provides the following:

• Subject to the conditions set forth below, 50% of the Annual Variable Remuneration is paid in cash and the remaining 50% is paid in BBVA shares.

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• 50% of such cash amount and shares, respectively, is deferred in its entirety for a three-year period, with cliff vesting at the end of such period, and its accrual and vesting is subject to compliance with a series of multi-year indicators.

• Any shares that are vested as part of the Annual Variable Remuneration are subject to a one-year retention period as from their respective vesting, except with respect to an amount of shares which sale would allow for the payment of any tax accruing on the shares received.

• No hedging strategies may be carried out on the locked-up shares or on the shares pending to be received.

• Circumstances have been established in which the unvested deferred portion of the Annual Variable Remuneration may be subject to forfeiture (malus clauses).

• The deferred portion of the Annual Variable Remuneration shall be updated under the terms established by the Board of Directors.

In addition, in the first quarter of 2016, executive directors received the relevant deferred portions of the Annual Variable Remuneration corresponding to 2014, 2013 and 2012, which were vested in application of the settlement and payment system for the Annual Variable Remuneration corresponding to such years, under the applicable policy for such years.

The remuneration paid to executive directors during 2016 is indicated below in thousands of euros, for cash amounts, and number of shares, for share amounts. The figures are given individually for each executive director and itemized:

	Fixed Remuneration in Cash		2015 Annual Variable Remuneration in Cash (1)		Deferred Variable Remuneration in Cash (2)		Total Cash		2015 Annual Variable Remuneration in BBVA Shares (1)		Deferred Variable Remuneration in BBVA Shares (2)		Total Shares
Group Executive Chairman		1,966		897		893		3,756		135,300		103,112		238,412
CEO (*)		1,923		530		240		2,693		79,956		27,823		107,779
Head of Global Economics, Regulation & Public Affairs (“Head of GERPA”)		800		98		47		945		14,815		5,449		20,264
Total		4,689		1,526		1,180		7,394		230,071		136,384		366,455

(*) The variable remuneration paid to the CEO includes the remuneration accrued as Digital Banking Officer during the period in which he held this position in 2015 (four months).

(1) Amounts corresponding to 50% of 2015 Annual Variable Remuneration.

(2) Amounts corresponding to the sum of the deferred portions of the Annual Variable Remuneration from previous years (2014, 2013 and 2012), and their respective adjustments in cash for updating their value, payment or delivery of which was made in 2016, in application of the settlement and payment system, as broken down below:

• Annual Variable Remuneration for 2014— The executive directors received the amount corresponding to the first third of the deferred Annual Variable Remuneration for 2014, both in cash and shares: €302 thousand and 37,392 BBVA shares for the Group Executive Chairman; €95 thousand and 11,766 BBVA shares for the CEO; and €30 thousand and 3,681 BBVA shares for the Head of GERPA.

• Annual Variable Remuneration for 2013—The executive directors received the amount corresponding to the second third of the deferred Annual Variable Remuneration for 2013, both in cash and shares: €289 thousand and 29,557 BBVA shares for the Group Executive Chairman; €78 thousand and 7,937 BBVA shares for the CEO; and €17 thousand and 1,768 BBVA shares for the Head of GERPA.

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• Annual Variable Remuneration for 2012— The Group Executive Chairman and the CEO received the amount corresponding to the final third of the deferred Annual Variable Remuneration for 2012, both in cash and shares: €301 thousand and 36,163 BBVA shares for the Group Executive Chairman; and €68 thousand and 8,120 BBVA shares for the CEO.

In application of the settlement and payment system of Annual Variable Remuneration for the years 2013 and 2014, during the first quarter of each of the next two years, the executive directors will receive the deferred portions of the Annual Variable Remuneration from such years (2014 and 2013), as applicable, and subject to the relevant conditions, while 50% of the Annual Variable Remuneration corresponding to the year 2015 will vest, subject to the terms and conditions described above, in 2019.

During 2016, executive directors received payment in kind, including insurance premiums, and others, for a total amount of €240 thousand, of which €17 thousand corresponded to the Group Executive Chairman; €139 thousand to the CEO; and €84 thousand to the Head of GERPA.

Annual Variable Remuneration for executive directors for year 2016

Following year-end 2016, the Annual Variable Remuneration for executive directors corresponding to that year was determined based on the conditions established for that purpose at its beginning, as set forth in the Directors’ Remuneration Policy approved by the general shareholders’ meeting held on March 13, 2015. Consequently, during the first quarter of 2017, executive directors received 50% of the 2016 Annual Variable Remuneration, in equal parts in cash and in shares, i.e., €734 thousand and 114,204 BBVA shares for the Group Executive Chairman; €591 thousand and 91,915 BBVA shares for the CEO; and €89 thousand and 13,768 BBVA shares for the Head of GERPA.

The payment of the remaining 50%, in cash and in shares, has been deferred for a three-year period, and its accrual and vesting will be subject to compliance with multi-year indicators established by the Board of Directors at the beginning of each year. Based on the result of each multi-year indicator during the deferred period and applying the relevant performance scales and weightings, the final amount of the deferred Annual Variable Remuneration will be determined after the end of the three-year deferral period. The deferred Annual Variable Remuneration may be reduced and may even reach zero, but in no event may be increased, as a result of these adjustments. The maximum amounts that could be received during the first quarter of 2020 corresponding to the deferred Annual Variable Remuneration for 2016 are: €734 thousand and 114,204 BBVA shares for the Group Executive Chairman; €591 thousand and 91,915 BBVA shares for the CEO; and €89 thousand and 13,768 BBVA shares for the Head of GERPA; in each case subject to the settlement and payment system established in the Directors’ Remuneration Policy applicable to 2016 Annual Variable Remuneration.

Remuneration for Senior Management received in 2016

During 2016, the remuneration paid to the members of the BBVA Senior Management as a whole, excluding the executive directors, is indicated below in thousands of euros for cash amounts and number of shares for shares amounts.

	Fixed Remuneration in Cash		2015 Annual Variable Remuneration in Cash (1)		Deferred Variable Remuneration in Cash (2)		Total Cash		2015 Annual Variable Remuneration in BBVA Shares (1)		Deferred Variable Remuneration in BBVA Shares (2)		Total Shares
Total Members of the Senior Management (*)		11,115		2,457		1,343		14,915		370,505		155,746		526,251

(*) Includes aggregate information regarding the members of the BBVA Group Senior Management, excluding executive directors, who were members of the Senior Management at December 31, 2016 (14 members).

(1) Amounts corresponding to 50% of 2015 Annual Variable Remuneration.

(2) Amounts corresponding to the sum of the deferred parts of the Annual Variable Remuneration from previous years (2014, 2013 and 2012) and their corresponding adjustments in cash for updating their value, payment or delivery of which was made in 2016 to the members of the Senior Management who had accrued this right, as broken down below:

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• Annual Variable Remuneration for 2014— The relevant members of the BBVA Group Senior Management, excluding executive directors, received the amount corresponding to the first third of the deferred Annual Variable Remuneration for 2014, with an aggregate amount of €515 thousand and 63,862 BBVA shares.

• Annual Variable Remuneration for 2013— The relevant members of the BBVA Group Senior Management, excluding executive directors, received the amount corresponding to the second third of the deferred Annual Variable Remuneration for 2013, with an aggregate amount of €434 thousand and 44,426 BBVA shares.

• Annual Variable Remuneration for 2012— The relevant members of the BBVA Group Senior Management, excluding executive directors, received the amount corresponding to the final third of the deferred Annual Variable Remuneration for 2012: the aggregate amount of €395 thousand and 47,458 BBVA shares.

During the first quarter of each of the next two years, members of the Senior Management will receive the amounts that correspond to them under the settlement and payment system of the variable remuneration applicable to each such member, stemming from the settlement of the deferred Annual Variable Remuneration for previous years (2014 and 2013) and subject to the conditions established therein, while 50% of the Annual Variable Remuneration corresponding to the year 2015 will vest, subject to the terms and conditions previously described for executive directors, in 2019.

Additionally, in 2016, members of the Senior Management, excluding executive directors, received remuneration in kind (including insurance premiums and others) in an aggregate amount of €664 thousand.

System of remuneration in shares with deferred delivery for non-executive directors

BBVA has a remuneration system in shares with deferred delivery for its non-executive directors, which was originally approved by the general shareholders’ meeting held on March 18, 2006 and extended under the general shareholders’ meeting resolutions dated on March 11, 2011 and March 11, 2016, for a further five-year period in each case.

This system consists in the annual allocation of a number of “theoretical shares” to the non-executive directors, equivalent to 20% of the total cash remuneration received by each of them in the previous year, according to the closing prices of BBVA shares during the sixty trading sessions prior to the dates of the annual general shareholders’ meetings approving the corresponding financial statements for each year.

The shares, where applicable, will be delivered to each beneficiary on the date such beneficiary leaves directorship on any grounds other than serious dereliction of duty.

The number of “theoretical shares” allocated in 2016 to each non-executive director, as beneficiary of the system of remuneration in shares with deferred delivery, corresponding to 20% of the total cash remuneration received by said beneficiaries in 2015, was as follows:

	Theoretical shares allocated in 2016		Theoretical shares accumulated as of December 31, 2016
Tomás Alfaro Drake		11,363		62,452
José Miguel Andrés Torrecillas		9,808		9,808
José Antonio Fernández Rivero		12,633		91,046
Belén Garijo López		6,597		19,463
Carlos Loring Martínez de Irujo		10,127		74,970
Lourdes Máiz Carro		5,812		8,443
José Maldonado Ramos		11,669		57,233
José Luis Palao García-Suelto		11,070		51,385
Juan Pi Llorens		9,179		32,374
Susana Rodríguez Vidarte		14,605		78,606
Total (1)		102,863		485,780

⁽¹⁾  In addition, in 2016, Ramón Bustamante y de la Mora and Ignacio Ferrero Jordi, who ceased as directors on March 11, 2016, were allocated 8,709 and 11,151 theoretical shares, respectively.

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Pension commitments

The commitments undertaken regarding pension benefits for the Chief Executive Officer and the Head of GERPA, pursuant to BBVA’s Bylaws and their respective contracts with the Bank, include a pension system covering retirement, disability and death.

Up until December 31, 2016, the Chief Executive Officer’s contractual conditions determined that he would retain the defined-benefit pension system to which he was entitled previously as senior manager in the Group, with the benefits and the provisions being adjusted to the remuneration conditions derived from his position as Chief Executive Officer.

As regards the Head of GERPA, up until December 31, 2016, he retained the same pension system he had had since his appointment as executive director in 2013, which comprised a defined-contributions system amounting to 20% of his annual fixed remuneration to cover retirement commitments and provisions covering death and disability.

As a result of the aforementioned pension commitments in place, the provisions recorded as of December 31, 2016 to cover pension commitments undertaken for the Chief Executive Officer amounted to €16,051 thousand, of which, during 2016 and according to applicable accounting regulations, €2,342 thousand were provisioned against earnings of the year and €836 thousand against equity, in order to adapt to the interest rate assumption used for the valuation of pension commitments in Spain. In the case of the Head of GERPA, the provisions recorded as of December 31, 2016 amounted to €609 thousand, of which €310 were provisioned against earnings of the year. In both cases, these amounts include the provisions covering retirement, as well as death and disability.

There were no other pension obligations in favor of other executive directors.

The provisions recorded as of December 31, 2016 for pension commitments relating to members of the Senior Management, excluding executive directors, amounted to €46,299 thousand, of which, during 2016 and according to applicable accounting regulations, €4,895 thousand were provisioned against earnings of the year and €2,226 thousand against equity, in order to adapt to the interest rate assumption used for the valuation of pension commitments in Spain. These amounts include the provisions covering retirement, as well as death and disability.

As a result of the entry into force of Circular 2/2016, of the Bank of Spain for credit institutions, 15% of the annual contributions agreed to pension plans of executive directors and members of BBVA’s Senior Management will be considered discretionary pension benefits. As a result, such portion will be treated as deferred variable remuneration, delivered in BBVA shares and subject to retention and clawback conditions as determined in applicable regulations, as well as to those conditions of variable remuneration applicable under the new Remuneration Policy.

Additionally, and as a result of the newly approved Directors’ Remuneration Policy, amendments have been introduced in the contractual framework of the Chief Executive Officer and the Head of GERPA.

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As regards the Chief Executive Officer, his pension scheme has been transformed from a defined-benefit system to a defined-contribution system, with the following main features:

a) Retirement benefits:

• Entitlement to a retirement benefit, when he reaches the legal retirement age, which shall be the amount arising from the annual contributions made by the Bank and applicable yields at that date.

• Annual contributions amount €1,642 thousand (subject to update to the same extent as the Annual Fixed Remuneration), determined on the basis of the benefit committed under the previous defined-benefit scheme and taking into consideration the provision made by the Bank to date to cover such commitment.

• Entitlement to receive the benefit, upon reaching the age of retirement provided he does not leave his position as Chief Executive Officer due to serious breach of duties. The amount of the benefit shall be the contributions made by the Bank to that date under such terms.

• Application of rules on discretionary pension benefits to 15% of the annual contribution.

b) Death: entitlement to an annual widow’s pension, as well as an orphan’s pension for each child until they reach the age of 25, of an amount equivalent to 70% and 25% (40% in the event of total orphanhood), respectively, of the annual fixed remuneration.

c) Disability: entitlement to an annual pension in an amount equivalent to the annual fixed remuneration, which would revert to his spouse and children in the event of death in the percentages described above.

As regards the Head of GERPA, the following amendments have been introduced:

a) Retirement benefits included in the defined-contribution scheme:

• Defined-contribution of 30% of annual fixed remuneration.

• Application of rules on discretionary pension benefits to 15% of the annual contribution.

Extinction of contractual relationship

The Bank does not have any commitments to pay severance indemnity to executive directors.

As a result of the new contractual framework envisaged in the Directors’ Remuneration Policy approved by the annual general shareholders’ meeting held on March 17, 2017, payments for the extinction of contractual relationships of the Chief Executive Officer and the Head of GERPA have been amended for 2017 onwards. In this sense, the possibility for the Chief Executive Officer to receive his retirement pension in advance has been eliminated, as has the Head of GERPA’s severance payment entitlement. The new contractual framework for both directors now includes a post-contractual non-compete agreement for a period of two years after they cease as BBVA executive directors, in accordance to which they shall receive remuneration in an amount equivalent to two times their annual fixed remuneration, paid over the course of the two-year period of non-competition, provided that leave of directorship is not due to death, retirement, disability or serious breach of duties.

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C. Board Practices

Committees

Our corporate governance system is based on the distribution of functions between the Board, the Executive Committee and the other specialized Board Committees, namely: the Audit and Compliance Committee; the Appointments Committee; the Remuneration Committee; the Risk Committee; and the Technology and Cybersecurity Committee.

Executive Committee

Our Board of Directors is assisted in fulfilling its responsibilities by the Executive Committee (Comisión Delegada Permanente) of the Board of Directors.

As of the date of this Annual Report, BBVA’s Executive Committee is comprised of two executive directors and four non-executive directors, as follows:

Position	Name
Chairman	Mr. Francisco González Rodríguez
Members	Mr. Carlos Torres Vila Mr. José Antonio Fernández Rivero Mr. Carlos Loring Martínez de Irujo Mr. José Maldonado Ramos Mrs. Susana Rodríguez Vidarte

According to our Board Regulations, the Executive Committee will be apprised of such business as the Board of Directors resolves to confer on it, in accordance with prevailing legislation, our Bylaws or our Board Regulations.

The Executive Committee shall meet on the dates indicated in the annual calendar of scheduled meetings and when the chairman or acting chairman so decides. During 2016, the Executive Committee met seventeen (17) times.

Audit and Compliance Committee

This committee shall perform the duties required under applicable laws, regulations and our Bylaws. Essentially, its mission is to assist the Board in overseeing the financial information and the exercise of the Group control duties.

The Board Regulations establish that the Audit and Compliance Committee shall have a minimum of four members, one of which shall be appointed by the Board taking into account his/her knowledge and background in accounting, auditing or both. In accordance with the Board Regulation, they shall all be independent directors, one of whom shall act as Chairman, also appointed by the Board. See “Item 16.A. Audit Committee Financial Expert”.

As of the date of this Annual Report, the Audit and Compliance Committee members are:

Position	Name
Chairman	Mr. José Miguel Andrés Torrecillas
Members	Mr. Tomás Alfaro Drake Mrs. Belén Garijo López Mrs. Lourdes Máiz Carro Mr. Juan Pi Llorens

Under the Board Regulations and the charter of the Audit and Compliance Committee, the scope of its functions is as follows (for purposes of the below, “entity” refers to BBVA):

• report to the general shareholders’ meeting on questions raised with respect to those matters falling within the Committee’s competence and, in particular, on the result of the audit explaining how it has contributed to the completeness of the financial information and the function performed by the Committee in this process;

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• oversee the efficacy of the internal control of the Company, the internal audit and the risk-management systems in the process of drawing up and reporting the regulatory financial information, including tax risks. Also to discuss with the financial auditor any significant weaknesses in the internal control system detected when the audit is conducted without undermining its independence. For such purposes, and where appropriate, the Committee may submit recommendations or proposals to the Board of Directors, and the corresponding period for monitoring;

• oversee the process of drawing up and reporting financial information and submit recommendations or proposals to the Board of Directors aimed at safeguarding its completeness;

• submit to the Board of Directors proposals on the selection, appointment, re-election and replacement of the external auditor, taking responsibility for the selection process in accordance with applicable regulations, as well as their contractual conditions, and regularly collect information from the external auditor regarding the audit plan and its implementation, as well as preserving the auditor’s independence in the performance of their duties;

• establish correct relations with the external auditor in order to receive information on any matters that may jeopardize their independence, for examination by the Committee, and any others relating to the process of the financial auditing; as well as those other communications provided for by law and by the auditing regulations. Each year it must unfailingly receive the external auditors’ declaration of their independence with regard to the Company or entities directly or indirectly related to it, as well as detailed and individualized information on additional services provided of any kind and the corresponding fees received by the external auditor or by persons or entities linked to them as provided for under the legislation on financial auditing;

• each year before the external financial auditor issues their report on the financial statements, to issue a report expressing an opinion on whether the independence of the external financial auditor has been compromised. This report must unfailingly contain the reasoned valuation of the provision of each of the additional services referred to in the previous subsection, considered individually and as a whole, other than the legally-required audit and with respect to the regime of independence or to the standards regulating the audit activity;

• report, prior to the Board of Directors adopting resolutions, on all those matters established by law, by our Bylaws and by the Board Regulations, and in particular on:

• the financial information that the Company must periodically publish;

• the creation or acquisition of a holding in special-purpose entities or entities domiciled in countries or territories considered tax havens; and

• related-party transactions;

• oversee compliance with applicable domestic and international regulations on matters related to money laundering, conduct on the securities markets, data protection and the scope of Group activities with respect to anti-trust regulations. Also to ensure that any requests for action or information made by official authorities with competence in these matters are dealt with in due time and in due form;

• ensure that the codes of ethics and of internal conduct on the securities market, as they apply to Group personnel, comply with regulatory requirements and are adequate;

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• especially to oversee compliance with the provisions applicable to directors contained in the Board Regulations, as well as their compliance with the applicable standards of conduct on the securities markets;

• any other duties that may have been allocated under the Board Regulations or attributed to the Committee by a Board of Directors resolution; and

• the Committee shall also monitor the independence of external auditors. This entails the following two duties:

• preventing any influence over the auditor’s warnings, opinions or recommendations. To this end, ensure that compensation for the auditor’s work does not compromise either its quality or independence, in compliance with current legislation on auditing at all times; and

• stipulating as incompatible the provision of audit and consulting services unless they are works required by supervisors or whose provision by the auditor is allowed by applicable legislation, and there are not available in the market alternatives as regards content, quality or efficiency of equal value to those which the auditor could provide; in this case approval by the Committee shall be required, but this decision can be delegated in advance to its Chairman. The auditor shall be prohibited from providing prohibited services outside the audit, in compliance with what is set out at all times by audit legislation.

The Committee leads the selection process of the external auditor for the Bank and its Group. It must verify that the audit schedule is being carried out under the service agreement and that it satisfies the requirements of the competent authorities and the Bank’s governing bodies. The Committee will also require the auditors, at least once each year, to assess the quality of the Group’s internal oversight procedures.

The Audit and Compliance Committee meets as often as necessary to comply with its functions, although an annual calendar of meetings will be drawn up in accordance with its duties. During 2016, the Audit and Compliance Committee met twelve (12) times.

Executives heading areas that manage matters within the scope of its competence, especially the Accounting, Internal Audit and Compliance departments, may be called to attend the Audit and Compliance Committee’s meetings and, at the request of these executives, other staff from these departments who have particular knowledge or responsibility in the matters contained in the agenda, when their presence at the meeting is deemed advisable. However, only the Committee members and the secretary will be present when the results and conclusions of the meeting are assessed.

The Committee may engage external advisory services for relevant issues when it considers that these cannot be properly provided by experts or technical staff within the Group on grounds of specialization or independence.

Likewise, the Committee may call on the personal cooperation and reports of any employee or member of the management team when it considers it necessary to comply with its functions in relevant issues.

The Committee has its own specific regulations, approved by the Board of Directors. These are available on our website and, amongst other things, regulate its operation.

Appointments Committee

The Appointments Committee is tasked with assisting the Board on issues related to the selection and appointment of Board members and other matters contained in the Board Regulations.

In compliance with the Board Regulations, this Committee shall comprise a minimum of three members who must be non-executive directors appointed by the Board of Directors, which will also appoint its Chairman. The Chairman and the majority of its members must be independent directors.

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As of the date of this Annual Report, the members of the Appointments Committee are:

Position	Name
Chairman	Mr. Tomás Alfaro Drake
Members	Mr. José Miguel Andrés Torrecillas Mrs. Lourdes Máiz Carro Mr. José Maldonado Ramos Mrs. Susana Rodríguez Vidarte

The duties of the Appointments Committee under the Board Regulations are as follows:

• submit proposals to the Board of Directors on the appointment, reelection or separation of independent directors and report on proposals for the appointment, re-election or separation of the other directors.

To such end, the Committee will evaluate the balance of skills, knowledge and expertise on the Board of Directors, as well as the conditions that candidates should display to fill the vacancies arising, assessing the dedication necessary to be able to suitably perform their duties in view of the needs that the Company’s governing bodies may have at any time.

The Committee will ensure that when filling new vacancies, the selection procedures are not marred by implicit biases that may entail any discrimination and in particular discrimination that may hinder the selection of female directors, trying to ensure that women who display the professional profile being sought are included on the shortlists.

Likewise, when drawing up proposals within its scope of competence for the appointment of directors the Committee will take into account in case they may be considered suitable, any applications that may be made by any member of the Board of Directors for potential candidates to fill the vacancies;

• submit proposals to the Board of Directors for policies on the selection and diversity of members of the Board of Directors;

• establish a target for representation of the underrepresented gender in the Board of Directors and draw up guidelines on how to reach that target;

• analyze the structure, size and composition of the Board of Directors, at least once a year when carrying out its operational assessment;

• analyze the suitability of the various members of the Board of Directors;

• perform an annual review of the status of each director, so that this may be reflected in the annual corporate governance report;

• report the proposals for the appointment of the Chairman and the Secretary and, where applicable, the Deputy Chairman and the Deputy Secretary;

• report on the performance of the duties of the Chairman of the Board, for the purposes of the periodic assessment by the Board of Directors, under the terms established in the Board Regulations;

• examine and organize the succession of the Chairman in conjuction with the Lead Director and, as applicable, file proposals with the Board of Directors so that the succession takes place in a planned and orderly manner;

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• review the Board of Directors’ policy on the selection and appointment of members of senior management, and file recommendations with the Board when applicable;

• report on proposals for appointment and separation of senior managers; and

• any other duties that may have been allocated under the Board Regulations or attributed to the Committee by a Board of Directors resolution or by applicable legislation.

In the performance of its duties, the Appointments Committee will consult with the Chairman of the Board via the Committee chair, especially with respect to matters related to executive directors and senior managers.

In accordance with our Board Regulations, the Committee may request the attendance at its sessions of persons with tasks in the Group that are related to the Committee’s duties. It may also obtain such advice as may be necessary to establish an informed opinion on matters related to its business.

The chair of the Appointments Committee will convene it as often as necessary to perform its functions. During 2016, the Appointments Committee met eight (8) times.

Remuneration Committee

The Remuneration Committee’s essential function is to assist the Board of Directors in matters relating to the remuneration policy for directors, senior managers and employees whose professional activities have a material impact on the Company’s risk profile. It seeks to ensure that the remuneration policy established by the Company is duly observed.

Under the Board Regulations, the Committee will comprise a minimum of three members who must be non-executive directors appointed by the Board, which will also appoint its Chairman. The Chairman and the majority of its members must be independent directors.

As of the date of this Annual Report, the members of the Remuneration Committee are:

Position	Name
Chairman	Mr. Juan Pi Llorens
Members	Mr. José Antonio Fernández Rivero Mrs. Belén Garijo López Mr. James Andrew Stott

In accordance with the Board Regulations, the scope of the functions of the Remuneration Committee is as follows:

• propose to the Board of Directors, for its submission to the shareholders’ general meeting, the directors’ remuneration policy, with respect to its items, amounts, and parameters for its determination and its vesting. Also to submit the corresponding report, in the terms established by applicable law at any time;

• determine the extent and amount of the individual remunerations, entitlements and other economic compensations and other contractual conditions for the executive directors, so that these can be reflected in their contracts. The Committee’s proposals on such matters will be submitted to the Board of Directors;

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• propose the annual report on the remuneration of the Bank’s directors to the Board of Directors each year, which will then be submitted to the annual shareholders’ general meeting, in compliance with the applicable legislation;

• propose the remuneration policy to the Board of Directors for senior managers and employees whose professional activities have a significant impact on the Company’s risk profile;

• propose the basic conditions of the senior management contracts to the Board of Directors, and directly supervise the remuneration of the senior managers in charge of risk management and compliance functions within the Company;

• oversee observance of the remuneration policy established by the Company and periodically review the remuneration policy applied to directors, senior managers and employees whose professional activities have a significant impact on the Company’s risk profile;

• verify the information on directors and senior managers remunerations contained in the different corporate documents, including the annual report on directors’ remuneration; and

• any other duties that may have been allocated under the Board Regulations or attributed to the Committee by a Board of Directors resolution or by applicable legislation.

In the performance of its duties, the Remuneration Committee will consult with the Chairman of the Board via the Committee chair, especially with respect to matters related to executive directors and senior managers.

Pursuant to our Board Regulations, the Committee may request the attendance at its meetings of persons with tasks in the Group that are related to the Committee’s duties. It may also obtain such advice as may be necessary to establish an informed opinion on matters related to its business.

The Chairman of the Remuneration Committee will convene it as often as necessary to comply with its functions. During 2016, the Remuneration Committee met six (6) times.

Risk Committee

The Board’s Risk Committee’s essential function is to assist the Board of Directors in the determination and monitoring of the Group risk management and control policy and its strategy within this scope.

The Risk Committee will comprise a minimum of three members, appointed by the Board of Directors, which will also appoint its Chairman. All Committee members must be non-executive directors, of whom at least one third must be independent directors. Its Chairman must also be an independent director.

As of the date of this Annual Report, the members of the Risk Committee are:

Position	Name
Chairman	Mr. James Andrew Stott
Members	Mr. José Miguel Andrés Torrecillas Mr. Carlos Loring Martínez de Irujo Mrs. Susana Rodríguez Vidarte

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Under the Board Regulations, it has the following duties:

• analyze and assess proposals related to the Group’s risk management, control and strategy. In particular, these will identify:

• the Group’s risk appetite; and

• establishment of the level of risk considered acceptable according to the risk profile and capital at risk, broken down by the Group’s businesses and areas of activity;

• analyze and assess the control and management policies for the Group’s different risks and information and internal control systems;

• the measures established to mitigate the impact of the risks identified, should they materialize;

• monitor the performance of the Group’s risks and their fit with the strategies and policies defined and the Group’s risk appetite;

• analyze, prior to submitting them to the Board of Directors or the Executive Committee, those risk transactions that must be put to its consideration;

• review whether the prices of assets and liabilities offered to customers take fully into account the Bank’s business model and risk strategy and, if not, present a remedy plan to the Board of Directors;

• participate in the process of establishing the remuneration policy, checking that it is consistent with sound and effective risk management and does not encourage risk-taking that exceeds the level of tolerated risk of the Company;

• check that the Company and its Group has the means, systems, structures and resources in line with best practices that enable it to implement its risk-management strategy, ensuring that the entity’s risk management mechanisms are matched to its strategy; and

• any other duties that may have been allocated under the Board Regulations or attributed to the Committee by a Board of Directors resolution or by applicable legislation.

Pursuant to our Board Regulations, the Committee may request the attendance of the Group Risks Officer at its meetings and also of other executives heading different risks areas or the persons who, within the Group organisation, have missions related to its functions. It may also obtain such advice as may be necessary to establish an informed opinion on matters related to its business.

The Committee meets as often as necessary to comply with its duties, usually once a week. In 2016, it held thirty-eight (38) meetings.

The Committee has its own specific regulations, approved by the Board of Directors. These are available on our website and, amongst other things, regulate its operation.

Technology and Cybersecurity Committee

The Technology and Cybersecurity Committee’s essential functions are to assist the Board of Directors in the understanding of the risks associated to technology and information systems related to the Group’s activity and the oversight of its management and control and in the supervision of the infrastructure and technology strategy of the Group.

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The Technology and Cybersecurity Committee will have a minimum of three members appointed by the Board among its directors, which will nominate the chairman of this Committee. For this purpose, the Board will take into consideration the knowledge and experience in technology, information systems and cyber-security matters of its members.

As of the date of this Annual Report, the members of the Technology and Cybersecurity Committee are:

Position	Name
Chairman	Mr. Carlos Torres Vila
Members	Mr. Tomás Alfaro Drake Mr. Sunir Kumar Kapoor Mr. Juan Pi Llorens Mr. James Andrew Stott

Under its regulations, the Technology and Cybersecurity Committee has the following responsibilities:

- Oversight of technology-related risks and cyber-security management, which include the following:

• Assess the main technology-related risks to which the Bank is exposed, including information security and cyber-security risks, and the steps management has taken to monitor and control its exposure to such risks.

• Review policies and systems in place for the assessment, control and management of the Group’s technology-related risks and its infrastructure, including responses to cyber-attacks and recovery plans.

• Obtain business continuity planning reports on technology and infrastructure matters from management.

• Obtain reports from management, as and when appropriate, on:

• IT-related compliance risks; and

• The steps taken to identify, assess, monitor, manage and mitigate those risks.

• Additionally, the Technology and Cybersecurity Committee will be informed of any relevant event that may occur regarding cyber-security issues. These are deemed to be those which, individually or in the aggregate, may have a material impact on the Group’s equity, results of operation or reputation. In any case, such events shall be informed to the chair of the Committee as soon as possible.

- Keeping abreast about the technology strategy of the Group, which include the following:

• Obtaining reports from management, as and when appropriate, on technology strategy and trends that may affect the Company’s strategic plans, including the monitoring of overall industry trends.

• Obtaining reports from management, as and when appropriate, on the metrics established by the Group for the management and control of IT-related matters, including the progress of the developments and investments carried out by the Group in this field.

• Obtaining reports from management, as and when appropriate, on matters related to new technologies, applications, information systems and best practices that affect the Group’s IT strategy or plans.

• Obtaining reports from management on the core policies, strategic projects and plans defined by the engineering area of the Bank.

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• Informing the Board of Directors and, if applicable, the Executive Committee, on any IT-related matters falling within the scope of their functions.

For a better performance of its functions, channels for an appropriate coordination between the Technology and Cybersecurity Committee and the Audit and Compliance Committee will be established to ensure:

(i) that the Technology and Cybersecurity Committee has access to the conclusions of the work performed by the Internal Audit Department in technology and cybersecurity matters; and

(ii) that the Audit and Compliance Committee is informed on IT-related systems and processes that are related to or affect the Bank’s internal control systems and other matters falling within the scope of its functions.

The Committee meets as often as necessary to comply with its functions. In 2016 it held three (3) meetings.

The Committee has its own specific regulations, approved by the Board of Directors. These are available on our website and, amongst other things, they regulate the Committee’s operation.

D. Employees

As of December 31, 2016, we, through our various subsidiaries, had 134,792 employees. Approximately 88% of our employees in Spain held technical, managerial and executive positions, while the remainder were clerical and support staff. The table below sets forth the number of BBVA employees by geographic area.

Country	BBVA		Bank subsidiaries		Non-bank subsidiaries		Total
Spain		26,884		—		4,567		31,451
United Kingdom		150		—		—		150
France		78		—		—		78
Italy		53		—		8		61
Germany		45		—		—		45
Switzerland		—		125		—		125
Portugal		—		490		—		490
Belgium		32		—		—		32
The Netherlands (Holland)		—		248		—		248
Russia		3		—		—		3
Romania		—		1,290		—		1,290
Ireland		—		4		—		4
Luxembourg		—		—		3		3
Turkey		—		22,140		—		22,140
Finland		—		—		39		39
Total Europe		27,245		24,297		4,617		56,159
The United States		128		10,416		—		10.544
Argentina		—		6,439		—		6,439
Brazil		1		—		7		8
Colombia		—		7,228		—		7,228
Venezuela		—		4,888		—		4,888
Mexico		—		37,378		—		37,378
Uruguay		—		618		—		618
Paraguay		—		463		—		463
Bolivia		—		—		366		366
Chile		—		4,522		—		4,522

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Country	BBVA		Bank subsidiaries		Non-bank subsidiaries		Total
Cuba		1		—		—		1
Peru		—		6,010		—		6,010
Total Latin America		2		67,546		373		67,921
Hong Kong		89		—		—		89
Japan		10		—		—		10
China		18		—		8		26
Singapore		10		—		—		10
India		2		—		—		2
South Korea		17		—		—		17
United Arab Emirates		3		—		—		3
Taiwan		7		—		—		7
Indonesia		2		—		—		2
Total Asia		158		—		8		166
Australia		2		—		—		2
Total Oceania		2		—		—		2
Total		27,535		102,259		4,998		134,792

As of December 31, 2015, we, through our various subsidiaries, had 137,968 employees. Approximately 88% of our employees in Spain held technical, managerial and executive positions, while the remainder were clerical and support staff. The table below sets forth the number of BBVA employees by geographic area.

Country	BBVA		Bank subsidiaries		Non-bank subsidiaries		Total
Spain		23,975		22		8,906		32,903
United Kingdom		161		—		—		161
France		84		—		—		84
Italy		55		—		23		78
Germany		46		—		—		46
Switzerland		—		125		—		125
Portugal		—		522		—		522
Belgium		32		—		—		32
The Netherlands (Holland)		—		246		—		246
Russia		3		72		—		75
Romania		—		1,187		—		1,187
Ireland		—		4		—		4
Luxembourg		—		—		3		3
Turkey		8		22,178		—		22,186
Total Europe		24,364		24,356		8,932		57,652
The United States		149		11,004		—		11,153
Argentina		—		5,974		—		5,974
Brazil		2		—		7		9
Colombia		—		7,257		—		7,257
Venezuela		—		5,233		—		5,233
Mexico		—		38,499		—		38,499
Uruguay		—		632		—		632
Paraguay		—		482		—		482
Bolivia		—		—		331		331
Chile		—		4,672		—		4,672

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Country	BBVA		Bank subsidiaries		Non-bank subsidiaries		Total
Cuba		1		—		—		1
Peru		—		5,857		—		5,857
Total Latin America		3		68,606		338		68,947
Hong Kong		128		—		—		128
Japan		10		—		—		10
China		16		—		14		30
Singapore		10		—		—		10
India		2		—		—		2
South Korea		22		—		—		22
United Arab Emirates		3		—		—		3
Taiwan		7		—		—		7
Indonesia		2		—		—		2
Total Asia		200		—		14		214
Australia		2		—		—		2
Total Oceania		2		—		—		2
Total		24,718		103,966		9,284		137,968

As of December 31, 2014, we, through our various subsidiaries, had 108,770 employees. Approximately 87% of our employees in Spain held technical, managerial and executive positions, while the remainder were clerical and support staff. The table below sets forth the number of BBVA employees by geographic area.

Country	BBVA		Bank subsidiaries		Non-bank subsidiaries		Total
Spain		25,049		18		3,553		28,620
United Kingdom		163		—		—		163
France		80		—		—		80
Italy		53		—		26		79
Germany		47		—		—		47
Switzerland		—		131		—		131
Portugal		—		688		—		688
Belgium		34		—		—		34
Russia		3		—		—		3
Ireland		—		5		—		5
Luxembourg		—		—		3		3
Turkey		16		—		—		16
Total Europe		25,445		842		3,582		29,869
The United States		154		10,790		—		10,944
Argentina		—		5,655		—		5,655
Brazil		2		—		5		7
Colombia		—		6,678		—		6,678
Venezuela		—		5,363		—		5,363
Mexico		—		38,107		—		38,107
Uruguay		—		639		—		639
Paraguay		—		481		—		481
Bolivia		—		—		291		—
Chile		—		4,567		—		4,567
Cuba		1		—		—		1
Peru		—		5,958		—		5,958
Total Latin America		3		67,448		296		67,747

182

Country	BBVA		Bank subsidiaries		Non-bank subsidiaries		Total
Hong Kong		128		—		—		128
Japan		10		—		—		10
China		14		—		14		28
Singapore		9		—		—		9
India		3		—		—		3
South Korea		19		—		—		19
United Arab Emirates		2		—		—		2
Taiwan		7		—		—		7
Indonesia		1		—		—		1
Total Asia		193		—		14		207
Australia		3		—		—		3
Total Oceania		3		—		—		3
Total		25,798		79,080		3,892		108,770

The terms and basic conditions of employment in private sector banks in Spain are negotiated with trade unions representing sector bank employees. Wage negotiations take place on an industry-wide basis. This process has historically produced collective bargaining agreements binding upon all Spanish banks and their employees. On June 15, 2016, the XXIII collective bargain agreement was signed. This agreement became effective as of January 1, 2015 and is set to expire on December 31, 2018.

As of December 31, 2016, 2015 and 2014, we had 1,598, 1,507 and 869 temporary employees in our Spanish offices, respectively.

E. Share Ownership

As of March 24, 2017, the members of the Board of Directors owned an aggregate of BBVA shares as shown in the table below:

Name	Directly owned shares		Indirectly owned shares		Total shares		% Capital Stock
Francisco González Rodríguez		2,437,472		1,716,113		4,153,585		0.063
Carlos Torres Vila		285,592		—		285,592		0.004
Tomás Alfaro Drake		17,609		—		17,609		0.000
José Miguel Andrés Torrecillas		10,632		—		10,632		0.000
José Antonio Fernández Rivero		74,467		—		74,467		0.001
Belén Garijo López		—		—		—		—
José Manuel González-Páramo Martínez-Murillo		71,200		—		71,200		0.001
Sunir Kumar Kapoor		—		—		—		—
Carlos Loring Martínez de Irujo		58,311		—		58,311		0.001
Lourdes Máiz Carro		—		—		—		—
José Maldonado Ramos		38,761		—		38,761		0.001
Juan Pi Llorens		—		—		—		—
Susana Rodríguez Vidarte		26,390		1,008		27,398		0.000
James Andrew Stott (*)		—		—		—		—
TOTAL		3,020,434		1,717,121		4,737,555		0.072

^(*) In addition, James Andrew Stott indirectly owns 10,000 BBVA’s ADSs.

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BBVA has not granted options on its shares to any members of its administrative, supervisory or management bodies.

As of March 24, 2017 the Senior Management (excluding executive directors) owned an aggregate of BBVA shares as shown in the table below:

Name	Directly owned shares		Indirectly owned shares		Total shares		% Capital Stock
Eduardo Arbizu Lostao		297,691		—		297,691		0.005
Domingo Armengol Calvo		104,539		—		104,539		0.002
Juan Asúa Madariaga		378,693		31,790		410,483		0.006
Ricardo Forcano García		37,316		—		37,316		0.001
Ricardo Gómez Barredo		50,000		—		50,000		0.001
Ricardo Enrique Moreno García		54,612		—		54,612		0.001
Eduardo Osuna Osuna		53,484		—		53,484		0.001
Cristina de Parias Halcón		151,169		—		151,169		0.002
Francisco Javier Rodríguez Soler		93,008		—		93,008		0.001
Jaime Sáenz de Tejada Pulido		280,639		—		280,639		0.004
Jorge Sáenz-Azcúnaga Carranza		80,624		—		80,624		0.001
Rafael Salinas Martínez de Lecea		160,329		18,187		178,516		0.003
José Luis de los Santos Tejero		198,753		23,279		222,032		0.003
Derek Jensen White		26,400		—		26,400		0.000
TOTAL		1,967,257		73,256		2,040,513		0.031

As of March 29, 2017 a total of 20,438 employees (excluding the members of the Senior Management and executive directors) owned 58,072,012 shares, which represented 0.88% of our capital stock.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

As of March 29, 2017, no person, corporation or government beneficially owned, directly or indirectly, five percent or more of BBVA’s shares. BBVA’s major shareholders do not have voting rights which are different from those held by the rest of its shareholders. To the extent known to us, BBVA is not controlled, directly or indirectly, by any other corporation, government or any other natural or legal person. As of December 31, 2016, there were 919,884 registered holders of BBVA’s shares, with an aggregate of 6,566,615,242 shares, of which 582 shareholders with registered addresses in the United States held a total of 1,019,225,582 shares (including shares represented by American Depositary Shares evidenced by American Depositary Receipts (“ADRs”)). Since certain of such shares and ADRs are held by nominees, the foregoing figures are not representative of the number of beneficial holders.

B. Related Party Transactions

Loans to Directors, Senior Management and Other Related Parties

As of December 31, 2016, there were no loans granted by the Group’s entities to the members of the Board of Directors. As of December 31, 2015 and 2014, the amount availed against loans by the Group’s entities to the members of the Board of Directors was €200 thousand and €235 thousand, respectively. As of December 31, 2016, 2015 and 2014 the amount availed against the loans by the Group’s entities to the members of Senior Management (excluding the executive directors) amounted to €5,573 thousand €6,641 thousand and €4,614 thousand, respectively.

184

As of December 31, 2016, there were no loans granted to parties related to the members of the Board of Directors. As of December 31, 2015 the amount availed against the loans to parties related to the members of the Bank’s Board of Directors was €10,000, and as of December 31, 2014, there were no loans to parties related to the members of the Bank’s Board of Directors. As of December 31, 2016, 2015 and 2014 the amount availed against the loans to parties related to members of the Senior Management amounted to €98 thousand, €113 thousand and €291 thousand, respectively.

As of December 31, 2016, 2015 and 2014 no guarantees had been granted to any member of the Board of Directors.

As of December 31, 2016, the amount availed against guarantees arranged with members of the Senior Management totaled €28 thousand. As of December 31, 2015 and 2014 no guarantees had been granted to any member of the Senior Management.

As of December 31, 2016, 2015 and 2014 the amount availed against loans and guarantees arranged with parties related to the members of the Bank’s Board of Directors and the Senior Management totaled €8 thousand, €1,679 thousand and €419 thousand, respectively.

Related Party Transactions in the Ordinary Course of Business

Loans extended to related parties (including guarantees) were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other unfavorable features.

BBVA subsidiaries engage, on a regular and routine basis, in a number of customary transactions with other BBVA subsidiaries, including:

• overnight call deposits;

• time deposits;

• foreign exchange purchases and sales;

• derivative transactions, such as forward purchases and sales;

• money market fund transfers;

• letters of credit for imports and exports;

• financial guarantees

• service level agreements;

and other similar transactions within the scope of the ordinary course of the banking business, such as loans and other banking services to our shareholders, to employees of all levels, to associates and to family members of all the above and to other BBVA non-banking subsidiaries or affiliates. All these transactions have been made:

• in the ordinary course of business;

• on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons; and

• did not involve more than the normal risk of collectability or present other unfavorable features.

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C. Interests of Experts and Counsel

Not Applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

Financial Information

See Item 18.

Dividends

The table below sets forth the amount of interim, final and total cash dividends paid by BBVA on its shares for the years 2012 to 2016. The rate used to convert euro amounts to U.S. dollars was the noon buying rate at the end of each year.

	Per Share
	First Interim				Second Interim						Third Interim					Final						Total
	€		$		€			$			€		$			€			$			€		$
2012	€	0.100	$	0.132		(	*)		(	*)	€	0.100	$	0.132			(	*)		(	*)	€	0.200	$	0.264
2013	€	0.100	$	0.138		(	*)		(	*)		—		—			(	*)		(	*)	€	0.100	$	0.138
2014	€	0.080	$	0.097		(	*)		(	*)		(*)		(*	)		(	*)		(	*)	€	0.080	$	0.097
2015	€	0.080	$	0.087		(	*)		(	*)	€	0.080	$	0.087			(	*)		(	*)	€	0.160	€	0.174
2016	€	0.080	$	0.084		(	*)		(	*)	€	0.080	$	0.084			(	*)		(	*)	€	0.160	€	0.169

(*) In execution of the 2012, 2013, 2014, 2015 and 2016 “Dividend Option” schemes described under “Item 4. Information on the Company—Business Overview —Supervision and Regulation—Dividends” approved by the shareholders in the respective general shareholders’ meetings, BBVA shareholders were given the option to receive their remuneration in newly issued ordinary shares or in cash.

We have paid annual dividends to our shareholders since the date we were founded. The cash dividend for a year is proposed by the Board of Directors to be approved by the annual general shareholders’ meeting following the end of the year to which it relates and includes any interim dividend that may be passed by the Board of Directors during that period. The scrip dividends are proposed for approval of our shareholders in the annual general shareholders’ meeting, for being implemented during a period of one year from their approval. Interim and final dividends are payable to holders of record on the record date for the dividend payment date. Unclaimed cash dividends revert to BBVA five years after declaration. For additional information see “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”.

While we expect to declare and pay dividends on our shares in the future, the payment of dividends will depend upon the results of BBVA, market conditions, the regulatory framework, the recommendations or restrictions regarding dividends that may be adopted by domestic or European regulatory bodies or authorities and other factors.

As described under “Item 4. Information on the Company— Business Overview—Supervision and Regulation—Dividends”, the annual shareholders’ general meeting held on March 17, 2017 passed a resolution adopting a capital increase to be charged to voluntary reserves for the implementation during 2017 of a “Dividend Option” on similar terms to those implemented since 2011. In accordance with its current dividend policy, BBVA’s subsequent dividends are expected to be paid in cash.

186

The “Dividend Option” is implemented as an alternative remuneration scheme for BBVA shareholders with the aim to provide BBVA shareholders with a flexible option to receive newly issued ordinary shares of the Bank, whilst always maintaining the possibility to choose to receive the entire remuneration in cash.

Subject to the terms of the deposit agreement entered into with the Bank of New York Mellon, holders of ADSs are entitled to receive dividends (in cash or scrip, as applicable) attributable to the shares represented by the ADSs evidenced by ADRs to the same extent as if they were holders of such shares.

BBVA may not pay dividends except out of its annual results and its unrestricted reserves available for the payment of dividends, after taking into account the applicable capital adequacy requirements and any recommendations on payment of dividends, and any other required authorization or restriction, if applicable. Capital adequacy requirements are applied on both a consolidated and individual basis. See “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Capital Requirements” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital”. Under applicable capital adequacy requirements, we estimate that as of December 31, 2016, BBVA had approximately €9.5 billion of reserves in excess of applicable capital and reserve requirements.

Legal Proceedings

As mentioned in “Item 3. Key Information—Risk Factors—Risks Relating to Us and Our Business—The Group is party to lawsuits, tax claims and other legal proceedings”, we operate in an increasingly regulated and litigious environment with a potential exposure to liability and other costs, which may not be easy to estimate. In this environment, the entities of the Group are party to legal actions, arising from the ordinary course of business, in a number of jurisdictions (including, among others, Spain, Mexico and the United States). While we cannot predict the outcome of these proceedings, according to the procedural status of these proceedings and our assessment of these matters, BBVA believes that, except as described below with respect to mortgage “floor” clauses, none of such proceedings, individually or in the aggregate, if resolved adversely, would result in a material adverse effect on the Group’s financial position, results of operations or liquidity. The Group’s management believes that adequate provisions have been made in respect of such legal proceedings, and considers that the possible contingencies that may arise from such ongoing lawsuits are not material.

“Floor” Clauses

On May 9, 2013, the Spanish Supreme Court issued a definitive ruling, rendered on a collective claim brought against BBVA among others, proclaiming the invalidity of “floor” clauses limiting the interest rates in mortgage loans with consumers (commonly referred to as “cláusulas suelo”) provided such clauses did not comply with certain requirements of material transparency set forth in the referred ruling. The Spanish Supreme Court also ruled that there were no grounds for the refund of the amounts collected by the lenders pursuant to those clauses prior to May 9, 2013.

In compliance with this ruling and as communicated to the market on June 12, 2013, BBVA eliminated or deprived of effect “floor” clauses in all mortgage loans with consumers since May 9, 2013.

Following the ruling of the Spanish Supreme Court, the Provincial Court of Alicante asked the Court of Justice of the European Union (the “CJEU”) to determine whether the limited retroactivity of the decision of the Spanish Supreme Court (which, as indicated above, had no impact on amounts collected by the lenders pursuant to “floor” clauses prior to May 9, 2013) was compatible with Council Directive 93/13/EEC of April 5, 1993, on unfair terms in consumer contracts (“Directive 93/13/EEC”). In July 2016, while the CJEU decision was still pending, BBVA estimated that the maximum amount subject to any potential claims, should the CJEU decide that the Supreme Court of Spain’s decision was not compatible with Directive 93/13/EEC, would be approximately €1.2 billion, indicating that the actual impact would probably be lower, based on past experiences.

On December 21, 2016, the CJEU’s decision was published. In its judgment, the CJEU stated that national case law setting time limits for the refund of amounts arising from the invalidity of an unfair term in a contract is contrary to Article 6(1) of Directive 93/13/EEC.

In connection with the preparation of its consolidated financial statements for the year ended December 31, 2016, BBVA analyzed as of the relevant balance sheet date its portfolio of mortgage loans to consumers in which there were “floor” clauses and recorded a provision of €577 million to cover the contingencies that may arise in connection with claims related to the legality of such clauses. This provision may be revised in future periods based on the evolution of such claims and other facts and circumstances as of the related reporting date.

187

On December 21, 2016, the CJEU’s decision was published. In its judgment, the CJEU stated that national case law setting time limits for the refund of amounts arising from the invalidity of an unfair term in a contract is contrary to Article 6(1) of Directive 93/13/EEC.

In connection with the preparation of its consolidated financial statements for the year ended December 31, 2016, BBVA analyzed as of the relevant balance sheet date its portfolio of mortgage loans to consumers in which there were “floor” clauses and recorded a provision of €577 million to cover the contingencies that may arise in connection with claims related to the legality of such clauses. This provision may be revised in future periods based on the evolution of such claims and other facts and circumstances as of the related reporting date.

B. Significant Changes

No significant change has occurred since the date of the Consolidated Financial Statements other than those mentioned in this Annual Report or our Consolidated Financial Statements.

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

BBVA’s shares are listed on the Spanish stock exchanges in Madrid, Bilbao, Barcelona and Valencia (the “Spanish Stock Exchanges”) and listed on the computerized trading system of the Spanish Stock Exchanges (the “Automated Quotation System”). BBVA’s shares are also listed on the Mexican and London stock exchanges as well as quoted on SEAQ International in London. BBVA’s shares are listed on the New York Stock Exchange as American Depositary Shares (ADSs).

ADSs are listed on the New York Stock Exchange and are also traded on the Lima (Peru) Stock Exchange, by virtue of an exchange agreement entered into between these two exchanges. Each ADS represents the right to receive one share.

Fluctuations in the exchange rate between the euro and the dollar will affect the dollar equivalent of the euro price of BBVA’s shares on the Spanish Stock Exchanges and the price of BBVA’s ADSs on the New York Stock Exchange. Cash dividends are paid by BBVA in euro, and exchange rate fluctuations between the euro and the dollar will affect the dollar amounts received by holders of ADRs on conversion by The Bank of New York Mellon (acting as depositary) of cash dividends on the shares underlying the ADSs evidenced by such ADRs.

As of December 31, 2016, State Street Bank and Trust Co., The Bank of New York Mellon, SA NV and Chase Nominees Ltd in their capacity as international custodian/depositary banks, held 11.74%, 5.18% and 7.04% of BBVA common stock, respectively. Of said positions held by the custodian banks, BBVA is not aware of any individual shareholders with direct or indirect holdings greater than or equal to 3% of BBVA common stock outstanding.

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The table below sets forth, for the periods indicated, the high and low sales closing prices for the shares of BBVA on the Automated Quotation System:

	Euro per Share
	High		Low
Fiscal year ended December 31, 2012
Annual		7.30		4.43
Fiscal year ended December 31, 2013
Annual		9.33		6.24
Fiscal year ended December 31, 2014
Annual		9.93		7.72
Fiscal year ended December 31, 2015
Annual		9.73		6.71
First Quarter		9.56		7.32
Second Quarter		9.73		8.79
Third Quarter		9.40		7.33
Fourth Quarter		8.19		6.71
Fiscal year ended December 31, 2016
Annual		6.76		4.76
First Quarter		6.64		5.24
Second Quarter		6.76		4.76
Third Quarter		5.75		4.79
Fourth Quarter		6.61		5.29
Month ended October 31, 2016		6.61		5.29
Month ended November 30, 2016		6.49		5.73
Month ended December 31, 2016		6.55		5.79
Fiscal year ended December 31, 2017
Month ended January 31, 2017		6.57		6.09
Month ended February 28, 2017		6.42		5.97
Month ended March 31, 2017 (through March 24, 2017)		7.21		6.36

From January 1, 2016 through December 31, 2016 the percentage of outstanding shares held by BBVA and its affiliates ranged between 0.000% and 0.756%, calculated on a daily basis. As of February 16, 2017, the percentage of outstanding shares held by BBVA and its affiliates was 0.255%.

The table below sets forth the reported high and low sales closing prices for the ADSs of BBVA on the New York Stock Exchange for the periods indicated.

	U.S. Dollars per ADR
	High		Low
Fiscal year ended December 31, 2012
Annual		9.72		5.34
Fiscal year ended December 31, 2013
Annual		12.78		8.22
Fiscal year ended December 31, 2014
Annual		13.54		9.39
Fiscal year ended December 31, 2015
Annual		10.65		7.33
First Quarter		10.36		8.44
Second Quarter		10.65		9.76
Third Quarter		10.34		8.20
Fourth Quarter		9.16		7.33
Fiscal year ended December 31, 2016
Annual		7.63		5.30
First Quarter		7.32		5.97
Second Quarter		7.63		5.30
Third Quarter		6.46		5.33
Fourth Quarter		7.21		5.92
Month ended October 31, 2016		7.21		5.92
Month ended November 30, 2016		7.20		6.05
Month ended December 31, 2016		6.89		6.16
Fiscal year ended December 31, 2017
Month ended January 31, 2017		6.98		6.54
Month ended February 28, 2017		6.81		6.40
Month ended March 31, 2017 (through March 24, 2017)		7.77		6.70

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Securities Trading in Spain

The Spanish securities market for equity securities consists of the Automated Quotation System and the four stock exchanges located in Madrid, Bilbao, Barcelona and Valencia. During 2016, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.

Automated Quotation System. The Automated Quotation System (Sistema de Interconexión Bursátil) links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates certain of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by Sociedad de Bolsas, S.A. (“Sociedad de Bolsas”), a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish Stock Exchange directly. Since January 1, 2000, Spanish banks have been allowed to place trades on the Automated Quotation System and have been allowed to become members of the Spanish Stock Exchanges. We are currently a member of the four Spanish Stock Exchanges and can trade through the Automated Quotation System.

In a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day, an opening price is established for each security traded on the Automated Quotation System based on orders placed at that time. The regime concerning opening prices was changed by an internal rule issued by the Sociedad de Bolsas. In this new regime all references to maximum changes in share prices are substituted by static and dynamic price ranges for each listed share, calculated on the basis of the most recent historical volatility of each share, and made publicly available and updated on a regular basis by the Sociedad de Bolsas. The computerized trading hours are from 9:00 a.m. to 5:30 p.m., during which time the trading price of a security is permitted to vary by up to the stated levels. If, during the open session, the quoted price of a share exceeds these static or dynamic price ranges, Volatility Auctions are triggered, resulting in new static or dynamic price ranges being set for the share object of the same. Between 5:30 p.m. and 5:35 p.m. a closing price is established for each security through an auction system similar to the one held for the pre-opening early in the morning.

Trading hours for block trades (i.e., operations involving a large number of shares) are also from 9:00 a.m. to 5:30 p.m.

Between 5:30 p.m. and 8:00 p.m., special operations, whether Authorized or Communicated, can take place outside the computerized matching system of the Sociedad de Bolsas if they fulfill certain requirements. In such respect Communicated special operations (those that do not need the prior authorization of the Sociedad de Bolsas) can be traded if all of the following requirements are met: (i) the trade price of the share must be within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day; (ii) the market member executing the trade must have previously covered certain positions in securities and cash before executing the trade; and (iii) the size of the trade must involve at least €300,000 and represent at least a 20% of the average daily trading volume of the shares in the Automated Quotation System during the preceding three months. If any of the aforementioned requirements is not met, a special operation may still take place, but it will need to take the form of Authorized special operation (i.e., those needing the prior authorization of the Sociedad de Bolsas). Such authorization will only be upheld if any of the following requirements are met:

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• the trade involves more than €1.5 million and more than 40% of the average daily volume of the stock during the preceding three months;

• the transaction derives from a merger or spin-off process or from the reorganization of a group of companies;

• the transaction is executed for the purposes of settling a litigation or completing a complex group of contracts; or

• the Sociedad de Bolsas finds other justifiable cause.

Information with respect to the computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas by the end of the trading day and published in the Boletín de Cotización and in the computer system by the beginning of the next trading day.

Sociedad de Bolsas is also the manager of the IBEX 35^® Index. This index is made up by the 35 most liquid securities traded on the Spanish Market and, technically, it is a price index that is weighted by capitalization and adjusted according to the free float of each company comprised in the index. Apart from its quotation on the four Spanish Exchanges, BBVA is also currently included in the IBEX 35^® Index.

Clearing and Settlement System

On April 1, 2003, by virtue of Law 44/2002 and of Order ECO 689/2003 of March 27, 2003 approved by the Spanish Ministry of Economy, the integration of the two main existing book-entry settlement systems existing in Spain at the time-the equity settlement system Servicio de Compensación y Liquidación de Valores (“SCLV”) and the Public Debt settlement system Central de Anotaciones de Deuda del Estado (“CADE”)- took place. As a result of this integration, a single entity, known as Sociedad de Gestión de los Sistemas de Registro Compensación y Liquidación de Valores (“Iberclear”) assumed the functions formerly performed by SCLV and CADE according to the legal regime then stated in article 44 bis of the Spanish Securities Market Act (Law 24/1988).

Notwithstanding the above, rules concerning the book-entry settlement systems enacted before this date by SCLV and the Bank of Spain, as former manager of CADE, continued in force, but any reference to the SCLV or CADE was deemed to be substituted by Iberclear.

In addition, and according to Law 41/1999, Iberclear manages three securities settlement systems for securities in book-entry form: The system for securities listed on the four Spanish Stock Exchanges, the system for Public Debt and the system for debt securities traded in “AIAF Mercado de Renta Fija”. Cash settlement, from February 18, 2008 for all systems is managed through the TARGET2-Banco de España payment system.

Laws 32/2011 and 11/2015 amended the Spanish Securities Market Act and Royal Decree 878/2015 replaced Royal Decree 116/1992 from February 3, 2016, introducing changes to the Spanish clearing, settlement and book-entry registry procedures applicable to securities transactions so as to allow post-trading Spanish systems to integrate into the TARGET2 System (TARGET2). The project to reform Spain’s clearing, settlement and registry system and connect it to the TARGET2 System (the “Reform”) has introduced significant changes that affect all classes of securities and all post-trade activities.

The Reform is being implemented in two phases:

(1) The first phase took place from April 27, 2016 and involved setting up a new system for equities including all the changes envisaged in the Reform, encompassing the incorporation of central counterparty clearing (to be performed by, among others, BME Clearing, S.A.U.) in post-trading whose design must be compatible with the TARGET2 System (including with respect to messages, account structure, definition of operations, etc.). Accordingly, the SCLV (Servicio de Compensación y Liquidación de Valores) platform was discontinued.

The T+3 settlement cycle for trades executed in trading venues, affecting mainly equities, was reduced to

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T+2 from October 2016, in line with what is set forth in European Regulation 909/2014, of July 23 on improving securities settlement in the European Union and on Central Securities Depositories.

The CADE platform will continue to operate unchanged until the last quarter of 2017, and cash settlements in the new system will continue to be made through the TARGET2-Bank of Spain cash accounts.

(2) The second phase will be implemented once Iberclear is connected to the TARGET2 System, scheduled for the last quarter of 2017. At that time, fixed-income securities will be transferred to the new system, and CADE will be discontinued.

Equities will also be settled in accordance with the procedures and time periods of the TARGET2 System, so that the interim settlement procedure followed in the first phase will be discontinued.

The second phase will entail unifying the registry and settlement approach for both equities and fixed-income securities.

The latest amendments to Iberclear’s Rulebook reflecting the Reform have been officially published in the Spanish Official Gazette (May 3 and August 18, 2016) while each Spanish Stock Exchange has approved its respective new rulebook.

The following paragraphs exclusively address issues relating to the securities settlement system managed by Iberclear before the Reform is implemented for securities listed on the Spanish Stock Exchanges (the “SCLV system”).

Under Law 41/1999 and Royal Decree 878/2015 (which replaced Royal Decree 116/1992 on February 3, 2015), transactions carried out on the Spanish Stock Exchanges are cleared and settled through Iberclear and its participants (each an entidad participante), through the SCLV system. Only Iberclear participants to this equity securities settlement system are entitled to use it, with participation restricted to authorized members of the Spanish Stock Exchanges (for whom participation was compulsory until March 2007), the Bank of Spain (when an agreement, approved by the Spanish Ministry of Economy and Finance, is reached with Iberclear) and, with the approval of the CNMV, other brokers not members of the Spanish Stock Exchanges, banks, savings banks and foreign clearing and settlement systems. BBVA is currently a participant in Iberclear. Iberclear and its participants are responsible for maintaining records of purchases and sales under the book-entry system. In order to be listed, shares of Spanish companies must be held in book-entry form. Iberclear, maintains a “two-step” book-entry registry reflecting the number of shares held by each of its participants as well as the amount of such shares held on behalf of beneficial owners. Each participant, in turn, maintains a registry of the owners of such shares. Spanish law considers the legal owner of the shares to be:

• the participant appearing in the records of Iberclear as holding the relevant shares in its own name, or

• the investor appearing in the records of the participant as holding the shares.

According to Iberclear’s Rulebook, members of the Spanish Stock Exchanges who do not want to hold Iberclear participant status need to appoint an Iberclear participant who will be responsible for the clearing and settlement of their trades.

Obtaining legal title to shares of a company listed on a Spanish Stock Exchange requires the participation of a Spanish broker-dealer, bank or other entity authorized under Spanish law to record the transfer of shares in book-entry form in its capacity as Iberclear participant for the equity securities settlement system. To evidence title to shares, at the owner’s request the relevant participant entity must issue a certificate of ownership. In the event the owner is a participant entity, Iberclear is in charge of the issuance of the certificate with respect to the shares held in the participant entity’s own name.

According to the Securities Market Act brokerage commissions are not regulated. Brokers’ fees, to the extent charged, will apply upon transfer of title of our shares from the depositary to a holder of ADSs, and upon any later sale of such shares by such holder. Transfers of ADSs do not require the participation of a member of a Spanish Stock Exchange. The deposit agreement provides that holders depositing our shares with the depositary in exchange for ADSs or withdrawing our shares in exchange for ADSs will pay the fees of the official stockbroker or other person or entity authorized under Spanish law applicable both to such holder and to the depositary.

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Securities Market Legislation

The Securities Markets Act was enacted in 1988 with the purpose of reforming the organization and supervision of the Spanish securities markets. This legislation and the regulation implementing it:

• established an independent regulatory authority, the CNMV, to supervise the securities markets;

• established a framework for the regulation of trading practices, tender offers and insider trading;

• required stock exchange members to be corporate entities;

• required companies listed on a Spanish Stock Exchange to file annual audited financial statements and to make public quarterly financial information;

• established the legal framework for the Automated Quotation System;

• exempted the sale of securities from transfer and value added taxes;

• deregulated brokerage commissions; and

• provided for transfer of shares by book-entry or by delivery of evidence of title.

On February 14, 1992, Royal Decree No. 116/92 established the clearance and settlement system and the book-entry system, and required that all companies listed on a Spanish Stock Exchange adopt the book-entry system. On February 3, 2016 Royal Decree 878/2015 came into force and replaced Royal Decree 116/1992.

On April 12, 2007, the Spanish Congress approved Law 6/2007, which amends the Securities Markets Act in order to adapt it to Directive 2004/25/EC on takeover bids, and Directive 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (amending Directive 2001/34/EC). Regarding the transparency of listed companies, Law 6/2007 amended the reporting requirements and the disclosure regime, and established changes in the supervision system. On the takeover bids side, Law 6/2007 has established the cases in which a company must launch a takeover bid and the ownership thresholds at which a takeover bid must be launched. It also regulates conduct rules for the board of directors of target companies and the squeeze-out and sell-out when a 90% of the share capital is held after a takeover bid. Additionally, Law 6/2007 was further developed by Royal Decree 1362/2007, on transparency requirements for issuers of listed securities, which was subsequently amended (see “— Trading by the Bank and its Affiliates in the Shares”).

On December 19, 2007, the Spanish Congress approved Law 47/2007, which amends the Securities Markets Act in order to adapt it to Directive 2004/37/EC on markets in financial instruments (MiFID), Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions, and Directive 2006/73/EC implementing Directive 2004/39/EC with respect to organizational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive. Further MiFID implementation was introduced by Royal Decree 217/2008.

The Regulation of the European Parliament and of the Council on short selling and certain aspects of credit default swaps (EU) No 236/2012 (Regulation) has been in force since March 25, 2012 and became directly effective in EU countries from November 1, 2012. This Regulation introduced a pan-European regulatory framework for dealing with short selling and requires persons to disclose short positions in relation to shares of EU listed companies and EU sovereign debt. For significant net short positions in shares of EU listed companies, these regulations create a two-tier reporting model: (i) when a net short position reaches 0.20% of an issuer’s share capital (and at every 0.1% thereafter), such position must be privately reported to the relevant regulator; and (ii) when such position reaches 0.50% (and at every 0.1% thereafter) of an issuer’s share capital, apart from being disclosed to the regulators, such position must be publicly reported to the market.

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Law 9/2012 and Royal Decree 1698/2012 implemented European Directive 2010/73/EU (which amended Directive 2003/71/EC, on the prospectus to be published when securities are offered to the public or admitted to trading and Directive 2004/109/EC, on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market).

Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MIFID II), and Regulation (EU) 600/2014 of the European Parliament and Council of May 15, 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 (MiFIR), were published on June 12, 2014 and, when fully implemented and in force, will affect the Spanish securities market legislation, markets and infrastructures. This could translate into higher compliance costs for financial institutions.

Royal Legislative Decree 4/2015, of October 23, approved the reinstated text of the Securities Markets Act.

Trading by the Bank and its Affiliates in the Shares

Trading by subsidiaries in their parent companies shares is restricted by the Corporate Enterprises Act.

Neither BBVA nor its affiliates may purchase BBVA’s shares unless the making of such purchases is authorized at a meeting of BBVA’s shareholders by means of a resolution establishing, among other matters, the maximum number of shares to be acquired and the authorization term, which cannot exceed five years. Restricted reserves equal to the purchase price of any shares that are purchased by BBVA or its subsidiaries must be made by the purchasing entity. The total number of shares held by BBVA and its subsidiaries may not exceed ten percent of BBVA’s total capital, as per the treasury stock limits set forth in the Corporate Enterprises Act (Royal Legislative Decree 1/2010). It is the practice of Spanish banking groups, including ours, to establish subsidiaries to trade in their parent company’s shares in order to meet imbalances of supply and demand, to provide liquidity (especially for trades by their customers) and to modulate swings in the market price of their parent company’s shares.

Reporting Requirements

Royal Decree 1362/2007 requires that any person or entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or is below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% and 90% of the capital stock of a company listed on a Spanish Stock Exchange must, within four stock exchange business days after that acquisition or transfer, report it to such company, and to the CNMV. This duty to report the holding of a significant stake is applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the ratio of an individual’s voting rights exceeds, reaches or is below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer.

In addition, any company listed on a Spanish Stock Exchange must report on a non-public basis to the CNMV, within four Stock Exchange business days, any acquisition by such company (or an affiliate) of the company’s own shares if such acquisition, together with any previous one from the date of the last communication, exceeds 1% of its capital stock, regardless of the balance retained. Members of the board of directors must report the ratio of voting rights held at the time of their appointment as members of the board, when they are ceased as members, and each time they transfer or acquire share capital of a company listed on the Spanish Stock Exchanges, regardless of the size of the transaction. Additionally, since we are a credit entity, any individual or company who intends to acquire a significant participation in BBVA’s share capital must obtain prior approval from the Bank of Spain in order to carry out the transaction. See “Item 10. Additional Information—Exchange Controls—Restrictions on Acquisitions of Shares”.

Royal Decree 1362/2007 also establishes reporting requirements in connection with any entity acting from a tax haven or a country where no securities regulatory commission exists, in which case the threshold of three percent is reduced to one percent.

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Regulation (EU) No 596/2014 of the European Parliament and of the Council of April 16, 2014 on market abuse and its implementing regulations entered into force on July 3, 2016, involving a number of changes for BBVA as a listed issuer, including in relation to areas such as disclosure of inside information to the market, maintenance of insider lists and disclosure of restrictions on dealings by directors and persons discharging managerial responsibilities.

Royal Decree 1362/2007 was amended in 2015 in order to, among other matters, include some changes to the reporting requirements applicable to major shareholdings. In particular, cash settled instruments creating long positions on underlying listed shares shall be disclosed if the specified shareholding threshold is reached or exceeded; cash holdings and holdings as a result of financial instruments shall be aggregated for disclosure purposes and a disclosure exemption for shareholding positions held by financial entities in their trading books is available.

Each Spanish bank is required to provide to the Bank of Spain a list dated the last day of each quarter of all the bank’s shareholders that are financial institutions and other non-financial institution shareholders owning at least 0.25% of a bank’s total share capital. Furthermore, the banks are required to inform the Bank of Spain, as soon as they become aware, and in any case not later than in 15 days, of each acquisition by a person or a group of at least one percent of such bank’s total share capital.

Ministerial Order EHA/1421/2009 developed the requirements set forth in the Securities Market Act on the publication of significant information. In this respect, the principles to be followed and conditions to be met by entities when they publish and report significant information are set forth, along with the content requirements, including when significant information is connected with accounting, financial or operational projections, forecasts or estimates. The reporting entity must designate at least one interlocutor whom the CNMV may consult or from whom it may request information relating to dissemination of the significant information. Lastly, some of the circumstances in which it is considered that an entity is failing to comply with the duty to publish and report significant information are described. These include, among others, cases in which significant information is disseminated at meetings with investors or shareholders or at presentations to analysts or to media professionals, but is not communicated, at the same time, to the CNMV.

Ministerial Order EHA/1421/2009 was modified by ministerial Order ECC/461/2013 which imposed on securities issuers the duty of publishing notices of significant information through their websites.

Circular 4/2009 of the CNMV further develops Ministerial Order EHA1421/2009. In this respect, the Circular sets forth a precise proceeding for the actual report of the significant information and draws up an illustrative list of the events that may be deemed to constitute significant information. This list includes, among others, events connected with strategic agreements and mergers and acquisitions, information relating to the reporting entity’s financial statements or those of its consolidated group, information on notices of call and official matters and information on significant changes in factors connected with the activities of the reporting entity and its group.

Tax Requirements

According to Law 10/2014, an issuer’s parent company (credit entity or listed company) is required, on an annual basis, to provide the Spanish tax authorities with the following: (i) disclosure of information regarding those investors with Spanish Tax residency obtaining income from securities and (ii) the amount of income obtained by them in each period.

B. Plan of distribution

Not Applicable.

C. Mark ets

See “Item 9. The Offer and Listing”.

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D. Selling Shareholders

Not Applicable.

E. Dilut ion

Not Applicable.

F. Expe nses of the Issue

Not Applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not Applicable.

B. Memorandum and Articles of Association

Spanish law and BBVA’s Bylaws are the main sources of regulation affecting the Company. All rights and obligations of BBVA’s shareholders are contained in BBVA’s Bylaws and in Spanish law. Pursuant to Royal Decree 84/2015 of February 13, implementing Law 10/2014, amendments of the Bylaws of a bank are subject to notice or prior authorization of the Bank of Spain.

Registry and Company’s Objects and Purposes

BBVA is registered with the Commercial Registry of Vizcaya (Spain). Its registration number at the Commercial Registry of Vizcaya is volume 2,083, Company section folio 1, sheet BI-17-1, 1st entry. Its corporate purpose is to engage in all kinds of activities, operations, acts, contracts and services within the banking business or directly or indirectly related to it that are permitted or not prohibited by prevailing provisions and ancillary activities. Its corporate purpose also includes the acquisition, holding, utilization and divestment of securities, public offerings to buy and sell securities, and any kind of holdings in any company or enterprise. BBVA’s corporate purpose is contained in Article 3 of BBVA’s Bylaws.

Certain Powers of the Board of Directors

In general, provisions regarding directors are contained in our Bylaws. Also, our Board Regulations govern the internal procedures and the operation of the Board of Directors and its Committees and directors’ rights and duties as described in their charter. The referred Board Regulations limit a director’s right to vote on a proposal, arrangement or contract in which the director is materially interested and require retirement of directors at a certain age. Directors are not required to hold shares of BBVA in order to be appointed as such. In relation to executive directors, please see “Item 6. Directors, Senior Management and Employees-Compensation” regarding their share-based compensation.

Lastly, the Board Regulations contain a series of ethical standards. For more information please see “Item 6. Directors, Senior Management and Employees”.

Certain Provisions Regarding Privileged Shares

Our Bylaws authorize us to issue ordinary, non-voting, redeemable and privileged shares. As of the date of the filing of this Annual Report, we have no non-voting, redeemable or privileged shares outstanding.

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The Company may issue shares that confer some privilege over ordinary shares under the legally established terms and conditions, complying with the formalities prescribed for amending our Bylaws.

Redemption of shares may only occur according to the terms set forth when they are issued. Redeemable shares must be fully paid-up at the time of their subscription. If the redemption right was attributed exclusively to the issuer, it may not be enforced until three years have elapsed since the issue. Redemption of redeemable shares must be charged to earnings or to free reserves or be made with the proceeds of a new share issue made under a resolution from the general shareholders’ meeting or, as the case may be, from the Board of Directors, for the purpose of financing the redemption transaction. If the redemption of these shares is charged to earnings or to free reserves, the Company must set up a reserve for the amount of the nominal value of the shares redeemed. If the redemption is not charged to earnings or free reserves or made with the proceeds of the issuance of new shares, it may only be carried out under the requirements established for the reduction of share capital by refunding contributions.

Holders of non-voting shares, if issued, are entitled to receive a minimum fixed or variable annual dividend, as resolved by the general shareholders’ meeting and/or the Board of Directors at the time of deciding to issue the shares. The right of non-voting shares to accumulate unpaid dividends whenever funds to pay dividends are not available, any preemptive subscription rights associated with non-voting shares, and the ability of holders of non-voting shares to recover voting rights also must be established at the time of deciding to issue the shares. Once the minimum dividend has been agreed upon, holders of non-voting shares will be entitled to the same dividend as holders of ordinary shares.

Certain Provisions Regarding Shareholders Rights

As of the date of the filing of this Annual Report, our capital is comprised of one class of ordinary shares, all of which have the same rights.

Once the allocation requirements established by law and in our Bylaws have been covered, dividends may be paid out to shareholders and charged to the year’s profit or to unrestricted reserves, in proportion to the capital they may have paid up, provided the value of the total net assets is not, or as a result of such distribution would not be, less than the share capital. Shareholders will participate in the distribution of earnings in proportion to their capital paid-up. The right to collect a dividend lapses after five years as of the date in which it was first available to the shareholders. Shareholders also have the right to participate in proportion to their capital paid-up in any distribution of net assets resulting from our liquidation. For more information regarding dividends see “Item 4. Information on the Company – Business Overview – Supervision and Regulation – Dividends”.

Each voting share will confer the right to one vote on the holder present or represented at the general shareholders’ meeting. However, unpaid shares with respect to which a shareholder is in default of the resolutions of the Board of Directors relating to their payment will not be entitled to vote. Our Bylaws contain no provisions regarding cumulative voting.

Our Bylaws do not contain any provisions relating to sinking funds or potential liability of shareholders to further capital calls by us.

Our Bylaws do not establish that special quorums are required to change the rights of shareholders. Under Spanish law, the rights of shareholders may only be changed by an amendment to the Bylaws that complies with the requirements explained below under “—Shareholders’ Meetings”, plus the affirmative vote of the majority of the shares of the class that will be affected by the amendment.

Shareholders’ Meetings

The annual general shareholders’ meeting has its own set of regulations on issues such as how it operates and what rights shareholders enjoy regarding general meetings. These establish the possibility of exercising or delegating votes over remote communication media.

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General shareholders’ meetings may be annual or extraordinary. The annual general shareholders’ meeting is held within the first six months of each year. It will give approval, among other things and where applicable, to the corporate management of the Company and the financial statements for the previous year and resolve as to the allocation of profits or losses. Extraordinary general shareholders’ meetings are those meetings that are not ordinary. In any case, the requirements mentioned below for constitution and adoption of resolutions are applicable to both categories of general shareholders’ meetings.

General shareholders’ meetings will be called at the initiative of and according to the agenda determined by the Board of Directors, whenever it deems necessary or advisable for the Company’s interests, and in any case on the dates or in the periods determined by law and the Company Bylaws, or upon the request of one or several shareholders representing at least three percent of our share capital.

Our general shareholders’ meeting Regulations establish that annual and extraordinary general shareholders’ meetings must be called within the notice period required by law. This will be done by means of an announcement published by the Board of Directors or its proxy in the Official Gazette of the Companies Registry (“BORME”) or one of the most widely disseminated daily newspapers in Spain within the notice period required by law, as well as being disseminated on the CNMV (the Spanish Securities Market Commission) website and the Company website, except when legal provisions establish other media for disseminating the notice.

The Company’s general shareholders’ meetings may be attended by anyone owning the minimum number of shares established in our Bylaws (500), provided that their holding is registered in the corresponding accounting records five days before the meeting is scheduled and that they keep at least that same number of shares until the meeting is held. Holders of fewer shares may group together until they make up at least that number, appointing a representative.

General shareholders’ meetings will be validly constituted at first summons with the presence of at least 25% of our voting capital, either in person or by proxy. No minimum quorum is required to hold a general shareholders’ meeting at second summons. In either case, resolutions will be agreed by the majority of the votes. However, a general shareholders’ meeting will only be validly held with the presence of 50% of our voting capital at first summons or of 25% of the voting capital at second summons, in the case of resolutions concerning the following matters:

• debt issuances;

• share capital increases or decreases;

• the exclusion or limitation of the pre-emptive subscription rights over new shares;

• transformation, merger of BBVA or spin-off and global assignment of assets and liabilities;

• the off-shoring of domicile, and

• any other amendment to the Bylaws.

In these cases, resolutions may only be approved with the vote of the absolute majority of the shares if at least 50% of the voting capital is present or represented at the general shareholders’ meeting. If the voting capital present or represented at the meeting at second summons is less than 50% (but over 25%), then resolutions may only be adopted by two-thirds of the shares present or represented.

Additionally, our Bylaws state that, in order to adopt resolutions approving the replacement of the corporate purpose, the transformation, total spin-off, the winding up of BBVA and amending that paragraph of the relevant article of our Bylaws, two-thirds of the subscribed voting capital must attend the general shareholders’ meeting at first summons, or 60% of that capital at second summons.

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Restrictions on the Ownership of Shares

Our Bylaws do not provide for any restrictions on the ownership of our ordinary shares. Spanish law, however, provides for certain restrictions which are described below under “— Exchange Controls—Restrictions on Acquisitions of Shares”.

Restrictions on Foreign Investments

The Spanish Stock Exchanges are open to foreign investors. Investments in shares of Spanish companies by foreign entities or individuals may be freely executed but require the notification to the Spanish Foreign Investment Authorities for administrative statistical and economical purposes. See “— Exchange Controls”. In addition, they are subject to certain restrictions and requirements which are also applicable to investments by domestic entities or individuals.

Current Spanish regulations provide that foreign investors may freely transfer out of Spain any amounts of invested capital, capital gains and dividends subject to applicable taxes. See “— Exchange Controls”.

C. Material Contracts

Shareholders’ Agreement in Connection with Garanti

On November 1, 2010, in connection with the acquisition of our initial stake in Garanti, we entered into a shareholders’ agreement with Doğuş, which was subsequently amended and restated on November 19, 2014. The amended and restated shareholders’ agreement ceased to be in effect upon the closing, on March 22, 2017, of our acquisition of an additional 9.95% stake in Garanti.

While the amended and restated shareholders’ agreement allowed BBVA to appoint the Chairman of Garanti’s board of directors, the majority of its members and Garanti’s CEO, it also provided for a list of reserved matters which had to be implemented or approved (either at a meeting of the shareholders or of the board) with each party’s consent. For example, Doğuş’ consent was necessary to approve any decisions in connection with the disposal or discontinuance of, or material changes to, any line of business or business entity within the Garanti group that had a value in excess of 25% of the Garanti group’s total net assets, in one financial year. In addition, the amended and restated shareholders’ agreement provided for certain rights of first offer, tag-along rights and a lock-up period in respect of Garanti shares owned by Doğuş. Moreover, the parties agreed to seek to maintain Garanti’s listing on the Istanbul Exchange and to distribute at least 25% of Garanti’s distributable profits as long as they held a certain stake in Garanti.

D. Exchange Controls

In 1991, Spain adopted the EU Standards for free movement of capital and services. As a result, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation as to amount, subject to applicable taxes. See “—Taxation”.

Pursuant to Spanish Law 18/1992 on Foreign Investments and Royal Decree 664/1999 on the Applicable rules to Foreign Investments, foreign investors may freely invest in shares of Spanish companies except in the case of certain strategic industries.

Notwithstanding this, Royal Decree 664/1999 and Law 19/2003, on exchange controls and foreign transactions, require notification of all foreign investments in Spain and liquidations of such investments upon completion of such investments to the Investments Registry of the Ministry of Economy and Competitiveness for administrative statistical and economical purposes. Shares in listed Spanish companies acquired or held by foreign investors must be reported to the Spanish Registry of Foreign Investments by the depositary bank or relevant Iberclear member. When a foreign investor acquires shares that are subject to the reporting requirements of the CNMV regarding significant stakes, notice must be given directly by the foreign investor to the relevant authorities.

Moreover, investments by foreigners domiciled in enumerated tax haven jurisdictions, under Royal Decree 1080/1991, are subject to special reporting requirements.

In certain circumstances and following a specific procedure, the Council of Ministers may agree to suspend the application of Royal Decree 664/1999, if the investments, due to their nature, form or condition, affect or may potentially affect activities relating to the exercise of public powers, national security or public health. Law 19/2003 authorizes the Spanish Government to take measures to impose specific limits or prohibitions, related to third countries, when such measures have been previously approved by the European Union or by an international organization to which Spain is member. Should such regimes be suspended, the affected investor shall obtain prior administrative authorization.

Restrictions on Acquisitions of Shares

Pursuant to Spanish Law 10/2014, any individual or corporation, acting alone or in concert with others, intending to directly or indirectly acquire a significant holding in a Spanish financial institution (as defined in article 16 of the aforementioned Law 10/2014) or to directly or indirectly increase its holding in one in such a way that either the percentage of voting rights or of capital owned were equal to or exceed 20%, 30% or 50%, or by virtue of the acquisition, might take control over the financial institution, must first notify the Bank of Spain.

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For the purpose of this Law, a significant participation is considered 10% of the outstanding share capital of a financial institution or a lower percentage if such holding allows for the exercise of a significant influence.

The Bank of Spain will be responsible for evaluating the proposed transaction, in accordance with the terms established by Royal Decree 84/2015, of February 13, (as stated in Article 25.1 of said Royal Decree 84/2015) in order to guarantee the sound and prudent operation on the target financial institution. The Bank of Spain will submit a proposition before the European Central Bank, which will be in charge of deciding upon the proposed transaction in the term of 60 working days after the date on which the notification was received.

Any acquisition without such prior notification, or before the period established in the Royal Decree 84/2015 has elapsed or against the objection of the Bank of Spain, will produce the following results:

• the acquired shares will have no voting rights;

• if considered appropriate, the target bank may be taken over or its directors replaced; and

• the sanctions established in Title IV of Law 10/2014.

Regarding the transparency of listed companies, Law 6/2007 amended the Securities Markets Act on takeover bids and transparency requirements for issuers. The transparency requirements have been further developed by Royal Decree 1362/2007 developing the Securities Markets Act on transparency requirement for issuers of listed securities, specifically information on significant stakes, reducing the communication threshold to 3%, and extending the disclosure obligations to the acquisition or transfer of financial instruments that grant rights to acquire shares with voting rights. For more information see “Item 9. The Offer and Listing—Offer and Listing Details — Reporting Requirements”.

Tender Offers

The Spanish legal regime concerning takeover bids, which reflects the related EU regulation (mainly Directive 2004/25/EC), is set forth in Royal Decree 4/2015, of October 23, approving the restated text of the Securities Market Act, and Royal Decree 1066/2007, of July 29, on takeover bids.

E. Taxation

Spanish Tax Considerations

The following is a summary of the material Spanish tax consequences to U.S. Residents (as defined below) of the acquisition, ownership and disposition of BBVA’s ADSs or ordinary shares as of the date of the filing of this Annual Report. This summary does not address all tax considerations that may be relevant to all categories of potential purchasers, some of whom (such as life insurance companies, tax-exempt entities, dealers in securities or financial institutions) may be subject to special rules. In particular, the summary deals only with the U.S. Holders (as defined below) that will hold ADSs or ordinary shares as capital assets and who do not at any time own individually, and are not treated as owning, 25% or more of BBVA’s shares, including ADSs.

As used in this particular section, the following terms have the following meanings:

(1) “U.S. Holder” means a beneficial owner of BBVA’s ADSs or ordinary shares that is for U.S. federal income tax purposes:

• a citizen or an individual resident of the United States,

• a corporation or other entity treated as a corporation, created or organized under the laws of the United States, any state therein or the District of Columbia, or

• an estate or trust the income of which is subject to U.S. federal income tax without regard to its source.

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(2) “Treaty” means the Convention between the United States and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, together with a related Protocol.

(3) “U.S. Resident” means a U.S. Holder that is a resident of the United States for the purposes of the Treaty and entitled to the benefits of the Treaty, whose holding is not effectively connected with (1) a permanent establishment in Spain through which such holder carries on or has carried on business, or (2) a fixed base in Spain from which such holder performs or has performed independent personal services.

Holders of ADSs or ordinary shares should consult their tax advisors, particularly as to the applicability of any tax treaty. The statements regarding Spanish tax laws set out below are based on interpretations of those laws in force as of the date of this Annual Report. Such statements also assume that each obligation in the Deposit Agreement and any related agreement will be performed in full accordance with the terms of those agreements.

Taxation of Dividends

Under Spanish law, cash dividends paid by BBVA to a holder of ordinary shares or ADSs who is not resident in Spain for tax purposes and does not operate through a permanent establishment in Spain, are subject to Spanish Non-Resident Income Tax, withheld at source at a 19% tax rate. For these purposes, upon distribution of the dividend, BBVA or its paying agent will withhold an amount equal to the tax due according to the rules set forth above (applying a withholding tax rate of 19%), transferring the resulting net amount to the depositary.

However, under the Treaty, if you are a U.S. Resident, you are entitled to a reduced withholding tax rate of 15%. To benefit from the Treaty-reduced rate of 15%, if you are a U.S. Resident, you must provide to BBVA through our paying agent depositary, before the tenth day following the end of the month in which the dividends were payable, a certificate from the U.S. Internal Revenue Service (“IRS”) stating that, to the best knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty and entitled to its benefits.

If the paying agent depositary provides timely evidence (i.e., by means of the IRS certificate) of your right to apply the Treaty-reduced rate it will immediately receive the surplus amount withheld, which will be credited to you. The IRS certificate is valid for a period of one year from issuance.

To help shareholders obtain such certificates, BBVA has set up an online procedure to make this as easy as possible.

If the certificate referred to in the above paragraph is not provided to us through our paying agent depositary within said term, you may afterwards obtain a refund of the amount withheld in excess of the rate provided for in the Treaty.

Scrip Dividend

As described under “Item 4. Information on the Company— Business Overview—Supervision and Regulation—Dividends—Scrip Dividend”, the BBVA annual shareholders’ general meeting held on March 17, 2017, passed a resolution adopting a capital increase to be charged to voluntary reserves for the implementation of a “Dividend Option” during 2017. This remuneration scheme offers the shareholders the possibility of electing how they would like to receive their remuneration: in cash or in newly issued ordinary shares.

Pursuant to the terms of the “Dividend Option” program, upon its implementation, the shareholders will receive one right of free allocation for each share of BBVA that they hold as of a given record date. These rights will be tradable on the Spanish Stock Exchanges for a minimum period of 15 natural days. BBVA will undertake to purchase the rights of free allocation tendered by the shareholders to it during a certain period of time at a fixed price, subject to the conditions that may be imposed each time the “Dividend Option” program is implemented. This fixed price will be the result of dividing the Reference Price (as defined below) by the number of rights necessary to receive one new share plus one. At the end of the tradable period of the rights of free allocation, the rights not validly tendered to BBVA will be automatically converted into newly-issued ordinary shares of the Company. The number of rights necessary for the allocation of one new share and the total number of shares to be issued by BBVA will depend, amongst other factors, on the arithmetic mean of the weighted average prices of BBVA’s shares on the Spanish Stock Exchanges over the five trading sessions immediately prior to the Board of Directors’ resolution concerning the execution of the relevant capital increase to be charged to reserves (the “Reference Price”).

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Consequently, when each of the capital increases implementing the “Dividend Option” scheme is executed, the shareholders of BBVA will have the option to freely choose among:

a) Not transferring their rights of free allocation. In this case, at the end of the trading period, the shareholders will receive the number of newly issued paid-up ordinary shares to which they are entitled. For tax purposes, the vesting of free-of-charge shares does not comprise income for the purposes of the Spanish Non-Residents’ Income Tax, whether or not non-residents act through a permanent establishment in Spain.

The acquisition value of both the new shares received as a consequence of each capital increase and the shares from which they originate will result from distributing the total cost among the number of shares (both old and those issued as free-of-charge shares). Such free-of-charge shares will be deemed to have been held for as long as the shares from which they originate.

b) To transfer all or some of their rights of free allocation on the market at the price at which those rights are traded at that moment. In this case, the amount obtained from the transfer of such rights on the market will, in general, be subject to the following tax treatment:

1. Until December 31, 2016:

For purposes of the Spanish Non-Residents’ Income Tax, when the transaction is carried out without a permanent establishment, the amount obtained from the transfer of the rights of free allocation on the market will be subject to the same tax treatment as pre-emptive subscription rights. Accordingly, for tax purposes, the amount obtained from the transfer of the rights of free allocation is subtracted from the acquisition value of the shares from which these rights originate, pursuant to article 37.1.a) of Law 35/2006, of November 28, on Personal Income Tax (Ley del Impuesto sobre la Renta de las Personas Físicas—From January 1, 2017, article 37.1.a) of Law 35/2016 has been modified (by virtue of Sixth Final Disposition, Law 26/2014)), which partially amends the Acts on Corporate Income Tax, Non-Residents’ Income Tax and Wealth Tax.

Thus, only if the amount obtained from the aforementioned transfer exceeds the acquisition value of the shares from which they originate, will the difference be considered a capital gain for the transferor in the tax period in which the transfer takes place.

2. From January 1, 2017:

For purposes of the Spanish Non-Residents Income Tax, when the transaction is carried out without a permanent establishment, the amount obtained from the transfer of the rights of free allocation on the market will be considered a capital gain for the transferor in the tax period in which the transfer takes place. Such amount will be subject to a withholding tax rate of 19%.

c) To transfer all or some of their rights of free allocation to BBVA under the purchase commitment assumed by the Bank. The tax treatment applicable to the amount obtained in the transfer to the Company of the rights of free allocation due to the shareholders’ status as such, will be equivalent to the tax treatment applicable to dividends directly distributed in cash and, consequently, such amount will be subject to the corresponding withholding tax (currently, 19%).

It should be borne in mind that this analysis does not cover all the possible tax consequences. Therefore, shareholders are advised to consult with their tax advisors.

Spanish Refund Procedure

According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004 dated July 30, 2004, as amended, a refund for the amount withheld in excess of the Treaty-reduced rate can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. Resident, you are required to file:

• the corresponding Spanish tax form,

• the certificate referred to in the preceding section, and

• evidence of the Spanish Non-Resident Income Tax that was withheld with respect to you.

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The refund claim must be filed within four years from the date in which the withheld tax was collected by the Spanish tax authorities, but not before February 1, of the following year.

U.S. Residents are urged to consult their own tax advisors regarding refund procedures and any U.S. tax implications thereof.

U.S. Holders should consult their tax advisors regarding the availability of, and the procedures to be followed in connection with, this exemption.

Taxation of Rights

Distribution of preemptive rights to subscribe for new shares made with respect to your shares in BBVA will not be treated as income under Spanish law and, therefore, will not be subject to Spanish Non-Resident Income Tax. The exercise of such preemptive rights is not considered a taxable event under Spanish law and thus is not subject to Spanish tax. Capital gains derived from the disposition of preemptive rights received by U.S. Residents are generally not taxed in Spain provided that certain conditions are met (see “— Taxation of Capital Gains” below).

Taxation of Capital Gains

Under Spanish law, any capital gains derived from securities issued by persons residing in Spain for tax purposes are considered to be Spanish-source income and, therefore, are taxable in Spain. For Spanish tax purposes, gain recognized by you, if you are a U.S. Resident, from the sale of BBVA’s ADSs or ordinary shares will be treated as capital gains. Spanish Non-Resident Income Tax is currently levied at a 19% tax rate, on capital gains recognized by persons who are not residents of Spain for tax purposes, who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation and who do not operate through a fixed base or a permanent establishment in Spain.

Notwithstanding the discussion above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is resident in a country that has entered into a treaty for the avoidance of double taxation with an “exchange of information” clause (the Treaty contains such a clause) will be exempt from taxation in Spain. Additionally, capital gains realized by non-residents of Spain who are entitled to the benefit of an applicable treaty for the avoidance of double taxation will, in the majority of cases, not be taxed in Spain (since most tax treaties provide for taxation only in the taxpayer’s country of residence). If you are a U.S. Resident, under the Treaty, capital gains arising from the disposition of ordinary shares or ADSs will not be taxed in Spain. You will be required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities a certificate of residence in the United States from the IRS (discussed above in “— Taxation of Dividends”), together with the corresponding Spanish tax form.

Spanish Inheritance and Gift Taxes

Transfers of BBVA’s shares or ADSs upon death or by gift to individuals are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987), if the transferee is a resident in Spain for tax purposes, or if BBVA’s shares or ADSs are located in Spain, regardless of the residence of the transferee. In this regard, the Spanish tax authorities may argue that all shares of a Spanish corporation and all ADSs representing such shares are located in Spain for Spanish tax purposes. The applicable tax rate for individuals, after applying all relevant factors, ranges between approximately 7.65% and 81.6% under Spanish Law 29/1987. After determining the tax rate, some multipliers, that range from 1.0 to 2.4, are applied in order to assess the tax due. Those multipliers take into account the preexisting wealth of the inheritor / donee, and the kinship with the deceased / donor.

Corporations that are non-residents of Spain that receive BBVA’s shares or ADSs as a gift are subject to Spanish Non-Resident Income Tax at a 19% tax rate on the fair market value of such ordinary shares or ADSs as a capital gain tax. If the donee is a U.S. resident corporation, the exclusions available under the Treaty described in “— Taxation of Capital Gains” above will be applicable.

Spanish Transfer Tax

Transfers of BBVA’s ordinary shares or ADSs will be exempt from Transfer Tax (Impuesto sobre Transmisiones Patrimoniales) or Value-Added Tax. Additionally, no stamp duty will be levied on such transfers.

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U.S. Tax Considerations

The following summary describes material U.S. federal income tax consequences of the ownership and disposition of ADSs or ordinary shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold the securities. The summary applies only to U.S. Holders that are eligible for the benefits of the Treaty (in each case, as defined under “Spanish Tax Considerations” above) and that hold ADSs or ordinary shares as capital assets for tax purposes and does not address all of the tax consequences, including the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), known as the Medicare contribution tax, and tax consequences that may be relevant to holders subject to special rules, such as:

• certain financial institutions;

• dealers or traders in securities who use a mark-to-market method of accounting;

• persons holding ADSs or ordinary shares as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the ADSs or ordinary shares;

• persons whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar;

• persons liable for the alternative minimum tax;

• tax-exempt entities;

• partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

• persons holding ADSs or ordinary shares in connection with a trade or business conducted outside of the United States;

• persons who acquired our ADSs or ordinary shares pursuant to the exercise of any employee stock option or otherwise as compensation; or

• persons who own or are deemed to own 10% or more of our voting shares.

If an entity that is classified as a partnership for U.S. federal income tax purposes holds ADSs or ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding ADSs or ordinary shares and partners in such partnerships should consult their tax advisors as to the particular U.S. federal income tax consequences of holding and disposing of the ADSs or ordinary shares.

The summary is based upon the tax laws of the United States, including the Code, the Treaty, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly with retroactive effect. In addition, the summary is based in part on representations by the depositary and assumes that each obligation provided for in or otherwise contemplated by BBVA’s deposit agreement and any other related document will be performed in accordance with its terms. Prospective purchasers of the ADSs or ordinary shares are urged to consult their tax advisors as to the U.S., Spanish or other tax consequences of the ownership and disposition of ADSs or ordinary shares in their particular circumstances, including the effect of any U.S. state or local tax laws.

In general, for United States federal income tax purposes, a U.S. Holder who owns ADSs will be treated as the owner of the underlying ordinary shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying ordinary shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before shares are delivered to the depositary, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. Holders, as described below. Accordingly, the analysis of the creditability of Spanish taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by future actions that may be taken by such parties.

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This discussion assumes that BBVA is not, and will not become, a passive foreign investment company (“PFIC”) (as discussed below).

Taxation of Distributions

Distributions, before reduction for any Spanish income tax withheld by BBVA or its paying agent, made with respect to ADSs or ordinary shares (other than certain pro rata distributions of ordinary shares or rights to subscribe for ordinary shares of BBVA’s capital stock) will be includible in the income of a U.S. Holder as ordinary income, to the extent paid out of BBVA’s current or accumulated earnings and profits as determined in accordance with U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. The amount of such dividends will generally be treated as foreign-source dividend income and will not be eligible for the “dividends-received deduction” generally allowed to U.S. corporations under the Code. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid to certain non-corporate U.S. Holders will be taxable as “qualified dividend income” and therefore will be taxable at favorable rates applicable to long-term capital gains. U.S. Holders should consult their own tax advisors to determine the availability of these favorable rates in their particular circumstances.

The amount of dividend income will equal the U.S. dollar value of the euro received, calculated by reference to the exchange rate in effect on the date of receipt (which, for U.S. Holders of ADSs, will be the date such distribution is received by the depositary), whether or not the depositary or U.S. Holder in fact converts any euro received into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

A scrip dividend (such as a dividend distributed under the “Dividend Option” program, described in “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends—Scrip Dividend”) will be taxed in the same manner as a distribution of cash, regardless of whether a U.S. Holder elects to receive the dividend in shares rather than cash. If the U.S. Holder elects to receive the dividend in shares, the U.S. Holder will be treated as having received a distribution equal to the U.S. dollar fair market value of the shares on the date of distribution. The U.S. Holder’s tax basis in such shares received will be equal to the U.S. dollar fair market value of the shares on the date of distribution and the holding period for such shares will begin on the day following the distribution.

Subject to applicable limitations that vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, a U.S. Holder will be entitled to a credit against its U.S. federal income tax liability for Spanish income taxes withheld by BBVA or its paying agent at a rate not exceeding the rate the U.S. Holder is entitled to under the Treaty. Spanish taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against the U.S. Holder’s U.S. federal income tax liability. See “Spanish Tax Considerations–Taxation of Dividends” for a discussion of how to obtain the Treaty rate. The rules governing foreign tax credits are complex and, therefore, U.S. Holders should consult their tax advisors regarding the availability of foreign tax credits in their particular circumstances. Instead of claiming a credit, the U.S. Holder may, at its election, deduct such Spanish taxes in computing its U.S. federal taxable income. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.

Sale or Other Disposition of ADSs or Shares

For U.S. federal income tax purposes, gain or loss realized by a U.S. Holder on the sale or other disposition of ADSs or ordinary shares will be capital gain or loss in an amount equal to the difference between the U.S. Holder’s tax basis in the ADSs or ordinary shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. Such gain or loss will be long-term capital gain or loss if the U.S. Holder held the ordinary shares or ADSs for more than one year at the time of disposition. Gain or loss, if any, will generally be U.S. source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations.

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Passive Foreign Investment Company Rules

Based upon certain proposed Treasury regulations which are proposed to be effective for taxable years beginning after December 31, 1994 (“Proposed Regulations”), we believe that we were not a PFIC for U.S. federal income tax purposes for our 2016 taxable year. However, since our PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, less than 25% owned equity investments) from time to time and since there is no guarantee that the Proposed Regulations will be adopted in their current form and because the manner of the application of the Proposed Regulations is not entirely clear, there can be no assurance that we will not be considered a PFIC for any taxable year.

If we were treated as a PFIC for any taxable year during which a U.S. Holder held ADSs or ordinary shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of an ADS or an ordinary share would be allocated ratably over the U.S. Holder’s holding period for the ADS or the ordinary share. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as applicable for that taxable year, and an interest charge would be imposed on the amount of tax allocated to such taxable year. The same treatment would apply to any distribution received by a U.S. Holder on its ordinary shares or ADSs to the extent that such distribution exceeds 125% of the average of the annual distributions on the ordinary shares or ADSs received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. In addition, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or the prior taxable year, the favorable tax rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. Certain elections may be available (including a mark-to-market election) that may provide alternative tax treatments. U.S. Holders should consult their tax advisors regarding whether we are or were a PFIC, the potential application of the PFIC rules to their ownership and disposition of ordinary shares or ADSs, whether any of these elections for alternative treatment would be available and, if so, what the consequences of the alternative treatments would be in their particular circumstances. If we were a PFIC for any taxable year during which a U.S. Holder owned our shares, the U.S. Holder would generally be required to file IRS Form 8621 with their annual U.S. federal income tax returns, subject to certain exceptions.

Information Reporting and Backup Withholding

Information returns may be filed with the IRS in connection with payments of dividends on, and the proceeds from a sale or other disposition of, ADSs or ordinary shares. A U.S. Holder may be subject to U.S. backup withholding on these payments if the U.S. Holder fails to provide its taxpayer identification number to the paying agent and comply with certain certification procedures or otherwise establish an exemption from backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.

Certain U.S. Holders who are individuals or entities closely-held by individuals may be required to report information relating to securities of non-U.S. companies, or accounts through which they are held, subject to certain exceptions (including an exception for securities held in accounts maintained by U.S. financial institutions). U.S. Holders should consult their tax advisors regarding the effect, if any, of these rules on their ownership or disposition of ordinary shares or ADSs.

F. Dividends and Paying Agents

Not Applicable.

G. Statement by Experts

Not Applicable.

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H. Documents on Display

We are subject to the information requirements of the Exchange Act, except that as a foreign private issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by BBVA with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which BBVA’s ADSs are listed. In addition, the SEC maintains a web site that contains information filed or furnished electronically with the SEC, which can be accessed over the internet at http://www.sec.gov.

I. Subsidiary Information

Not Applicable.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Trading Portfolio Activities

Market risk originates as a result of movements in the market variables that impact the valuation of traded financial products and assets. The main risks can be classified as follows:

• Interest rate risk: This arises as a result of exposure to movements in the different interest-rate curves involved in trading. Although the typical products that generate sensitivity to the movements in interest rates are money-market products (deposits, interest-rate futures, call money swaps, etc.) and traditional interest-rate derivatives (swaps and interest-rate options such as caps, floors, swaptions, etc.), practically all the financial products are exposed to interest-rate movements due to the effect that such movements have on the valuation of the financial discount.

• Equity risk: This arises as a result of movements in share prices. This risk is generated in spot positions in shares or any derivative products whose underlying asset is a share or an equity index. Dividend risk is a sub-risk of equity risk, arising as an input for any equity option. Its variation may affect the valuation of positions and it is therefore a factor that generates risk on the books.

• Exchange rate risk: This is caused by movements in the exchange rates of the different currencies in which a position is held. As in the case of equity risk, this risk is generated in spot currency positions, and in any derivative product whose underlying asset is an exchange rate. In addition, the quanto effect (operations where the underlying asset and the instrument itself are denominated in different currencies) means that in certain transactions in which the underlying asset is not a currency, an exchange-rate risk is generated that has to be measured and monitored.

• Credit-spread risk: Credit spread is an indicator of an issuer’s credit quality. Spread risk occurs due to variations in the levels of spread of both corporate and government issues, and affects positions in bonds and credit derivatives.

• Volatility risk: This occurs as a result of changes in the levels of implied price volatility of the different market instruments on which derivatives are traded. This risk, unlike the others, is exclusively a component of trading in derivatives and is defined as a first-order convexity risk that is generated in all possible underlying assets in which there are products with options that require a volatility input for their valuation.

We believe the metrics developed to control and monitor market risk in the BBVA Group are aligned with best practices in the market, and they are implemented consistently across all the local market risk units.

Measurement procedures are established in terms of the possible impact of negative market conditions on the trading portfolio of the Group’s Global Markets units, both under ordinary circumstances and in situations of heightened risk factors.

The standard metric used to measure market risk is Value at Risk (“VaR”), which indicates the maximum loss that may occur in the portfolios at a given confidence level (99%) and time horizon (one day). This statistic value is widely used in the market and has the advantage of summing up in a single metric the risks inherent to trading activity, taking into account how they are related and providing a prediction of the loss that the trading book could sustain as a result of fluctuations in equity prices, interest rates, foreign exchange rates and commodity prices. The market risk analysis considers various risks, such as credit spread, basis risk, volatility and correlation risk.

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Headings of the balance sheet subject to VaR measurement

Most of the headings on the Group’s consolidated balance sheet subject to market risk are positions whose main metric for measuring their market risk is VaR. This table shows the accounting lines of the consolidated balance sheet as of December 31, 2016 in which there is a market risk in trading activity subject to this measurement.

	Main market risk metrics
	VaR		Other metrics(*)
	(In millions of Euros)
Assets subject to market risk
Financial assets held for trading		64,623		1,480
Available for sale financial assets		7,119		28,771
Of which:		—		3,559
Hedging derivatives		1,041		1,415
Liabilities subject to market risk
Financial liabilities held for trading		47,491		2,223
Hedging derivatives		1,305		689

(*) Includes mainly assets and liabilities managed by ALCO.

Although the table above provides information on the financial positions subject to market risk, such information is provided for information purposes only and does not reflect how market risk in trading activity is managed.

With respect to the risk measurement models used by the BBVA Group, the Bank of Spain has authorized the use of the internal model to determine bank capital requirements deriving from risk positions on the Banco Bilbao Vizcaya Argentaria S.A. and BBVA Bancomer trading book, which jointly account for around 66% of the Group’s trading-book market risk. For the rest of the geographical areas (mainly South America subsidiaries, Garanti and BBVA Compass), bank capital for the risk positions in the trading book is calculated using the standard model.

The current management structure includes the monitoring of market-risk limits, consisting of a scheme of limits based on VaR, economic capital (based on VaR measurements) and VaR sub-limits, as well as stop-loss limits for each of the Group’s business units.

The model used estimates VaR in accordance with the “historical simulation” methodology, which involves estimating losses and gains that would have taken place in the current portfolio if the changes in market conditions that took place over a specific period of time in the past were repeated. Based on this information, it infers the maximum expected loss of the current portfolio within a given confidence level. This model has the advantage of reflecting precisely the historical distribution of the market variables and not assuming any specific distribution of probability. The historical period used in this model is two years. The historical simulation method is used in Banco Bilbao Vizcaya Argentaria S.A., BBVA Bancomer, BBVA Chile, BBVA Colombia, BBVA Compass and Garanti.

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VaR figures are estimated following two methodologies:

• VaR without smoothing, which awards equal weight to the daily information for the previous two years. This is currently the official methodology for measuring market risks for the purpose of monitoring compliance with risk limits.

• VaR with smoothing, which gives a greater weight to more recent market information. This metric supplements the previous one.

In the case of South America subsidiaries (except BBVA Chile and BBVA Colombia), a parametric methodology is used to measure risk in terms of VaR.

At the same time, and following the guidelines established by the Spanish and European authorities, BBVA incorporates metrics in addition to VaR with the aim of meeting the Bank of Spain’s regulatory requirements with respect to the calculation of bank capital for the trading book. Specifically, the new measures incorporated in the Group since December 2011 (stipulated by Basel 2.5) are:

• VaR-: In regulatory terms, the VaR charge incorporates the stressed VaR charge, and the sum of the two (VaR and stressed VaR) is calculated. This quantifies the losses associated with the movements of the two risk factors inherent to market operations (including interest rates, exchange rates, equity risk and credit spread). Both VaR and stressed VaR are rescaled by a regulatory multiplier set at three and by the square root of ten to calculate the capital charge.

• Specific Risk- Incremental Risk Capital (“IRC”) Quantification of the risks of default and downgrading of the credit ratings of the bond and credit derivative positions in the portfolio. The specific capital risk by IRC is a charge exclusively used in the geographical areas with the internal model approved (Banco Bilbao Vizcaya Argentaria S.A. and BBVA Bancomer). The capital charge is determined according to the associated losses (calculated at a 99.9% confidence level over a one year horizon under the hypothesis of constant risk) due to the rating migration and/or default of the issuer with respect to an asset. In addition, the price risk is included in sovereign positions for the specified items.

• Specific Risk- Securitization and correlation portfolios. Capital charges for securitizations and the correlation portfolios are assessed based on the potential losses associated with the rating level of a specific credit structure (rating). Both are calculated by the standard method. The scope of the correlation portfolios refers to the FTD-type market operation and/or tranches of market CDOs and only for positions with an active market and hedging capacity.

Validity tests are performed regularly on the risk measurement models used by the Group. They estimate the maximum loss that could have been incurred in the assessed positions with a certain level of probability (backtesting), as well as measurements of the impact of extreme market events on risk positions (stress testing). As an additional control measure, backtesting is conducted at trading desk level in order to enable more specific monitoring of the validity of the measurement models.

Market risk in 2016

The Group’s market risk remains at low levels compared with the risk aggregates managed by BBVA, particularly in terms of credit risk. This is due to the nature of the business. During 2016 the average VaR was €29 million, above the 2015 figure of €24 million, with a high on January 28, 2016 of €38 million. The evolution in the BBVA Group’s market risk during 2016, measured as VaR without smoothing with a 99% confidence level and a one-day horizon (shown in millions of euros) was as follows.

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By type of market risk assumed by the Group’s trading portfolio, the main risk factor for the Group continued to be that linked to interest rates, with a weight of 58% of the total at the end of 2016 (this figure includes the spread risk). The relative weight has increased compared with the close of 2015 (48%). Exchange-rate risk accounted for 13%, decreasing its proportion with respect to December 31, 2015 (21%), while equity, volatility and correlation risk decreased, with a weight of 29% at the close of 2016 (compared to 32% at the close of 2015).

As of December 31, 2016, 2015 and 2014 the balance of VaR was €26 million, €24 million and €25 million respectively. These figures can be broken down as follows:

Risk	December 31, 2016			December 31, 2015			December 31, 2014
	(In Millions of Euros)
Interest/Spread risk		29			21			30
Currency risk		7			9			5
Stock-market risk		2			3			2
Vega/Correlation risk		12			11			7
Diversification effect(*)		(24	)		(20	)		(20	)
Total		26			24			25
VaR average in the period		29			24			23
VaR max in the period		38			30			28
VaR min in the period		23			21			20

(*) The diversification effect is the difference between the sum of the average individual risk factors and the total VaR figure that includes the implied correlation between all the variables and scenarios used in the measurement.

Validation of the internal market risk model

The internal market risk model is validated on a regular basis by backtesting in both Banco Bilbao Vizcaya Argentaria S.A. and BBVA Bancomer.

The aim of backtesting is to validate the quality and precision of the internal market risk model used by the BBVA Group to estimate the maximum daily loss of a portfolio, at a 99% level of confidence and a 250-day time horizon, by comparing the Group’s results and the risk measurements generated by the internal market risk model.

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These tests showed that the internal market risk model of both Banco Bilbao Vizcaya Argentaria, S.A. and BBVA Bancomer is adequate and precise.

Two types of backtesting have been carried out during the year 2016:

• “Hypothetical” backtesting: the daily VaR is compared with the results obtained, not taking into account the intraday results or the changes in the portfolio positions. This validates the appropriateness of the market risk metrics for the end-of-day position.

• “Real” backtesting: the daily VaR is compared with the total results, including intraday transactions, but discounting the possible minimum charges or fees involved. This type of backtesting includes the intraday risk in portfolios.

In addition, each of these two types of backtesting was carried out at the level of risk factor or business type, thus making a deeper comparison of the results with respect to risk measurements.

During 2016, the backtesting of the internal VaR calculation model was carried out, comparing the daily results obtained with the risk level estimated by the internal VaR calculation model. At the end of the year the comparison showed the internal VaR calculation model was working correctly, within the “green” zone (0-4 exceptions), thus validating the internal VaR calculation model, as has occurred each year since the internal market risk model was approved for the Group.

Stress test analysis

A number of stress tests are carried out on the BBVA Group’s trading portfolios. First, global and local historical scenarios are used that replicate the behavior of an extreme past event, such as for example the collapse of Lehman Brothers or the “Tequilazo” crisis. These stress tests are complemented with simulated scenarios, where the aim is to generate scenarios that have a significant impact on the different portfolios, but without being anchored to any specific historical scenario. Finally, for some portfolios or positions, fixed stress tests are also carried out that have a significant impact on the market variables affecting these positions.

Historical scenarios

The historical benchmark stress scenario for the BBVA Group is Lehman Brothers, whose sudden collapse in September 2008 led to a significant impact on the behavior of financial markets at a global level. The following are the most relevant effects of this historical scenario:

• Credit shock: reflected mainly in the increase of credit spreads and downgrades in credit ratings.

• Increased volatility in most of the financial markets (giving rise to a great deal of variation in the prices of different assets (currency, equity, debt).

• Liquidity shock in the financial systems, reflected by a major movement in interbank curves, particularly in the shortest sections of the euro and dollar curves.

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Simulated scenarios

Unlike the historical scenarios, which are fixed and therefore not suited to the composition of the risk portfolio at all times, the scenario used for the exercises of economic stress is based on a resampling methodology. This methodology is based on the use of dynamic scenarios that are recalculated periodically depending on the main risks affecting the trading portfolios. On a data window wide enough to collect different periods of stress (data are taken from January 1, 2008 until the date of the assessment), a simulation is performed by resampling of historic observations, generating a distribution of losses and gains that serve to analyze the most extreme of births in the selected historical window. The advantage of this resampling methodology is that the period of stress is not predetermined, but depends on the portfolio maintained at each time, and making a large number of simulations (10,000 simulations) allows a greater richness of information for the analysis of expected shortfall than what is available in the scenarios included in the calculation of VaR.

The main features of this approach are: a) the generated simulations respect the correlation structure of the data, b) there is flexibility in the inclusion of new risk factors and c) it allows the introduction of a lot of variability in the simulations (desirable for considering extreme events).

Structural Risk — Non-Trading Activities

Structural interest-rate risk

The structural interest-rate risk (“SIRR”) is related to the potential impact that variations in market interest rates have on an entity’s net interest income and equity. In order to properly measure SIRR, BBVA takes into account the main sources that generate this risk: repricing risk, yield curve risk, option risk and basis risk, which are analyzed from two complementary points of view: net interest income (short term) and economic value (long term).

ALCO monitors the interest-rate risk metrics and the Finance department carries out the management proposals for the structural balance sheet. The management objective is to ensure the stability of net interest income and book value in the face of changes in market interest rates, while respecting the internal solvency and limits in the different balance sheets and for BBVA Group as a whole and complying with current and future regulatory requirements.

BBVA’s structural interest-rate risk management control and monitoring is based on a set of metrics and tools aimed to enabling the entity’s risk profile to be monitored correctly. A wide range of scenarios are measured on a regular basis, including sensitivities to parallel movements in the event of different shocks, changes in slope and curve, as well as delayed movements. Other probabilistic metrics based on statistical scenario-simulating methods are also assessed, such as income at risk (“IaR”) and economic capital (“EC”), which are defined as the maximum adverse deviations in net interest income and economic value, respectively, for a given confidence level and time horizon. Impact thresholds are established on these management metrics both in terms of deviations in net interest income and in terms of the impact on economic value. The process is carried out separately for each currency to which the Group is exposed, and the diversification effect between currencies and business units is considered after this.

In order to guarantee its effectiveness, the model is subjected to regular internal validation, which includes backtesting. In addition, the banking books’ interest-rate risk exposures are subjected to different stress tests in order to reveal balance sheet vulnerabilities under extreme scenarios. This testing includes an analysis of adverse macroeconomic scenarios designed specifically by BBVA Research, together with a wide range of potential scenarios that aim to identify interest-rate environments that are particularly damaging for the entity. This is done by generating extreme scenarios of a breakthrough in interest rate levels and historical correlations, giving rise to sudden changes in the slopes and even to inverted curves.

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The model is necessarily underpinned by an elaborate set of hypotheses that aim to reproduce the behavior of the balance sheet as closely as possible to reality. Especially relevant among these assumptions are those related to the behavior of “accounts with no explicit maturity”, for which stability and remuneration assumptions are established, consistent with an adequate segmentation by type of product and customer, and prepayment estimates (implicit optionality). The hypotheses are reviewed and adapted at least on an annual basis, to signs of changes in behavior, kept properly documented and reviewed on a regular basis in the internal validation processes.

The impacts on the metrics are assessed both from a point of view of economic value (gone concern) and from the perspective of net interest income, for which a dynamic model (going concern) consistent with the corporate assumptions of earnings forecasts is used.

The table below shows the profile of average sensitivities of net interest income and value of the main regions where the BBVA Group operated in 2016:

	Impact on Net Interest Income (*)						Impact on Economic Value(**)
	100 Basis-Point Increase			100 Basis-Point Decrease			100 Basis-Point Increase			100 Basis-Point Decrease
Europe (***)		14.12	%		(7.09	)%		4.90	%		(3.62	)%
Mexico		2.13	%		(2.02	)%		(4.42	)%		2.55	%
USA		8.91	%		(8.30	)%		0.41	%		(7.57	)%
Turkey		(6.64	)%		4.64	%		(2.78	)%		3.84	%
South America		2.40	%		(2.41	)%		(2.82	)%		3.04	%
BBVA Group		4.15	%		(2.89	)%		2.69	%		(2.47	)%

(*) Percentual impact of “1 year” net interest income forecast for each unit.

(**) Percentual impact of core capital for each unit.

(***) In Europe downward movement allowed until more negative level than current rates.

In 2016 monetary policy in Europe has remained expansionary, which pushed interest rates lower, towards more negative levels in short term rates. In the United States, the Federal Reserve’s reference interest rate slowly continued the upward cycle initiated in 2015. While in Mexico, the upward interest rates cycle has intensified given the Mexican peso evolution and the country’s inflation prospects, setting the rates at their highest levels since 2009. In Turkey, the weakness of the Turkish lira has led to a rise in rates in the last quarter of 2016 following declines in the first three quarters. The main economies of South America appear to have completed the cycle of increases initiated at the end of 2015.

The BBVA Group in all its Balance Sheet Management Units (“BSMUs”) maintains a positive sensitivity in its net interest income to an increase in interest rates. The emerging market of Turkey, helps to diversify the Group’s net exposure due to the opposite direction of its position on Europe. Relatively higher sensitivities in the net interest income, are observed in mature markets (Europe and the United States), where, the negative sensitivity in their net interest income to decreases in interest rates is limited by the plausible downward trend in interest rates. The Group maintains a moderate risk profile, according to its target risk, through effective management of its balance sheet structural risk.

Structural exchange-rate risk

In the BBVA Group, structural exchange-rate risk arises from the consolidation of holdings in subsidiaries with functional currencies other than the euro. Its management is centralized in order to optimize the joint handling of permanent foreign currency exposures, taking into account the diversification.

The corporate Assets and Liabilities Management unit, through ALCO, designs and executes hedging strategies with the main purpose of controlling the potential negative effect of exchange-rate fluctuations on capital ratios and on the equivalent value in euros of the foreign-currency earnings of the Group’s subsidiaries, considering transactions according to market expectations and their cost.

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The risk monitoring metrics included in the system of limits are integrated into management and supplemented with additional assessment indicators. At corporate level they are based on probabilistic metrics that measure the maximum deviation in the Group’s capital, CET1 ratio, and net attributable profit. The probabilistic metrics make it possible to estimate the joint impact of exposure to different currencies taking into account the different variability in currency exchange rates and their correlations.

The suitability of these risk assessment metrics is reviewed on a regular basis through backtesting exercises. The final element of structural exchange-rate risk control is the analysis of scenarios and stress with the aim of identifying in advance possible threats to future compliance with the risk appetite levels set, so that any necessary preventive management actions can be taken. The scenarios are based both on historical situations simulated by the risk model and on the risk scenarios provided by BBVA Research.

As for the market, in 2016, it is noteworthy the U.S. dollar was strong, boosted by higher yields, and the outperformance of the currencies of some countries in the Andean area in South America, while the Mexican peso and Turkish lira depreciated against the U.S. dollar, affected by higher uncertainty and concerns about the growth in those economies.

The Group’s structural exchange-rate risk exposure level decreased since the end of 2015 mostly due to increased hedging, focused on the Mexican peso and the Turkish lira, intended to keep low levels of sensitivity to movements in the exchange rates of emerging currencies against the euro. The risk mitigation level in the Bank’s capital ratio due to the book value of BBVA Group’s holdings in foreign emerging market currencies stood at around 70% and, as of the end in 2016, CET1 ratio sensitivity to the appreciation of 1% in the euro exchange rate for each currency was as follows: U.S. dollar +1.2 bps; Mexican peso -0.2 bps; Turkish Lira -0.2 bps; other currencies: -0.3 bps. On the other hand, hedging of emerging-currency denominated earnings of 2016 stood at 47%, concentrated in Mexican peso and the Turkish lira.

Structural equity risk

The Group’s exposure to structural equity risk stems mainly from investments in industrial and financial companies with medium- and long-term investment horizons. This exposure is mitigated through net short positions held in derivatives of their underlying assets, used to limit portfolio sensitivity to potential falls in prices.

Structural management of equity portfolios is the responsibility of the Group’s units specializing in this area. Their activity is subject to the corporate risk management policies for equity positions in the equity portfolio. The aim is to ensure that they are handled consistently with BBVA’s business model and appropriately to its risk tolerance level, thus enabling long-term business sustainability.

The Group’s risk management systems also make it possible to anticipate possible negative impacts and take appropriate measures to prevent damage being caused to the entity. The risk control and limitation mechanisms are focused on the exposure, annual operating performance and economic capital estimated for each portfolio. Economic capital is estimated in accordance with a corporate model based on Monte Carlo simulations, taking into account the statistical performance of asset prices and the diversification existing among the different exposures.

Backtesting is carried out on a regular basis on the risk measurement model used.

European stock markets underperformed in 2016, while the main U.S. stock exchange indices reached historical maximum levels. Stock price volatility increased in 2016, and there was an initial shock in the financial markets after the Brexit referendum vote in the United Kingdom, due to the policy uncertainty that this process entails and its potential impact on Eurozone growth expectations. These effects led to a deterioration of capital gains accumulated in the BBVA Group’s equity portfolios as of the end of June, although such portfolios generally recovered as the main equity indices have recovered pre-Brexit levels.

Structural equity risk, measured in terms of economic capital, has decreased in 2016 as a result of the reduction of the stake in CNCB, along with lower positioning in some sectors.

Stress tests and analyses of sensitivity to different simulated scenarios are carried out periodically to analyze the risk profile in more depth. They are based on both past crisis situations and forecasts made by BBVA Research. This aims to check that the risks are limited and that the tolerance levels set by the Group are not at risk.

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The aggregate sensitivity of the BBVA Group’s consolidated equity to a 1% fall in the price of shares of the companies making up the equity portfolio stood at around -€38 million as of December 31, 2016. This estimate takes into account the exposure in shares valued at market prices, or if not applicable, at fair value (except for the positions in the Treasury Area portfolios) and the net delta-equivalent positions in options on their underlyings.

See Note 7 of the Consolidated Financial Statements for additional information on risks faced by BBVA.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. Debt Securities    

Not Applicable.

B. Warrants and Rights

Not Applicable.

C. Other Securities

Not Applicable.

D. American Depositary Shares

Our ADSs are listed on the New York Stock Exchange under the symbol “BBVA”. The Bank of New York Mellon is the depositary (the “Depositary”) issuing ADSs pursuant to an amended and restated deposit agreement dated June 29, 2007 among BBVA, the Depositary and the holders from time to time of ADSs (the “Deposit Agreement”). Each ADS represents the right to receive one share. The table below sets forth the fees payable, either directly or indirectly, by a holder of ADSs as of the date of this Annual Report.

Category	Depositary Actions	Associated Fee / By Whom Paid
(a) Depositing or substituting the underlying shares	Issuance of ADSs	Up to $5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADSs delivered (charged to person depositing the shares or receiving the ADSs)
(b) Receiving or distributing dividends	Distribution of cash dividends or other cash distributions; distribution of share dividends or other free share distributions; distribution of securities other than ADSs or rights to purchase additional ADSs	Not applicable
(c) Selling or exercising rights	Distribution or sale of securities	Not applicable
(d) Withdrawing an underlying security	Acceptance of ADSs surrendered for withdrawal of deposited securities	Up to $5.00 for each 100 ADSs (or portion thereof) evidenced by the ADSs surrendered (charged to person surrendering or to person to whom withdrawn securities are being delivered)
(e) Transferring, splitting or grouping receipts	Transfers, combining or grouping of depositary receipts	Not applicable
(f) General depositary services, particularly those charged on an annual basis	Other services performed by the Depositary in administering the ADSs	Not applicable

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Category	Depositary Actions	Associated Fee / By Whom Paid
(g) Expenses of the Depositary	Expenses incurred on behalf of holders in connection with •    stock transfer or other taxes (including Spanish income taxes) and other governmental charges; •    cable, telex and facsimile transmission and delivery charges incurred at request of holder of ADS or person depositing shares for the issuance of ADSs; •    transfer, brokerage or registration fees for the registration of shares or other deposited securities on the share register and applicable to transfers of shares or other deposited securities to or from the name of the custodian; •    reasonable and customary expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars	Expenses payable by holders of ADSs or persons depositing shares for the issuance of ADSs; expenses payable in connection with the conversion of foreign currency into U.S. dollars are payable out of such foreign currency

The Depositary may remit to us all or a portion of the Depositary fees charged for the reimbursement of certain of the expenses we incur in respect of the ADS program established pursuant to the Deposit Agreement upon such terms and conditions as we may agree from time to time. In the year ended December 31, 2016, the Depositary reimbursed us $1,289 thousand with respect to certain fees and expenses. The table below sets forth the types of expenses that the Depositary has agreed to reimburse and the amounts reimbursed in 2016.

Category of Expenses	Amount Reimbursed in the Year Ended December 31, 2016
	(In Thousands of Dollars)
NYSE Listing Fees		191.2
Investor Relations Marketing		438.2
Professional Services		525.6
Annual General Shareholders’ Meeting Expenses		120.1
Other		13.9

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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not Applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not Applicable.

ITEM 15. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of December 31, 2016, BBVA, under the supervision and with the participation of BBVA’s management, including our Group Executive Chairman, Chief Executive Officer and Head of Accounting & Supervisors, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.

Based upon their evaluation, BBVA’s Group Executive Chairman, Chief Executive Officer and Head of Accounting & Supervisors concluded, that BBVA’s disclosure controls and procedures are effective at a reasonable assurance level in ensuring that information relating to BBVA, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to the management, including principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

The management of BBVA is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. BBVA’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of BBVA;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of BBVA’s management and directors; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Under the supervision and with the participation of BBVA’s management, including our Group Executive Chairman, Chief Executive Officer and Head of Accounting & Supervisors, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control – 2013 Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)—Based on this assessment, our management concluded that, as of December 31, 2016, our internal control over financial reporting was effective based on those criteria.

In May 2013, COSO published an updated version of its Internal Control Integrated – Framework. This framework provides broader guidelines and clarifies the requirements for determining what constitutes effective internal control. After the analysis of the updated version, no significant changes have been implemented in the internal control model.

Our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte S.L., an independent registered public accounting firm, as stated in their report which follows below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Banco Bilbao Vizcaya Argentaria, S.A.:

We have audited the internal control over financial reporting of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (the “Company”) and subsidiaries composing the BANCO BILBAO VIZCAYA ARGENTARIA Group (the “Group”—Note 3) as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016 of the Group and our report dated March 31, 2017 expressed an unqualified opinion on those financial statements.

/s/ Deloitte S.L.

Madrid, Spain

March 31, 2017

Changes in Internal Control Over Financial Reporting

There has been no change in BBVA’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT

The charter for our Audit and Compliance Committee provides that the members of the Audit and Compliance Committee, and particularly its Chairman, shall be appointed with regard to their knowledge and background in accounting, auditing and risk management, and we have determined that Mr. José Miguel Andrés Torrecillas, the Chairman of the Audit and Compliance Committee has such experience and knowledge and is an “audit committee financial expert” as such term is defined by the regulations of the Securities and Exchange Commission issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Andrés is independent within the meaning of the New York Stock Exchange listing standards.

In addition, we believe that the remaining members of the Audit and Compliance Committee have an understanding of applicable generally accepted accounting principles, experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our Consolidated Financial Statements, an understanding of internal controls over financial reporting, and an understanding of audit committee functions. Our Audit and Compliance Committee has experience overseeing and assessing the performance of BBVA and its consolidated subsidiaries and our external auditors with respect to the preparation, auditing and evaluation of our Consolidated Financial Statements.

ITEM 16B.  CODE OF ETHICS

The BBVA Group Code of Conduct, which was updated by the Board of Directors on May 28, 2015, applies to all companies and persons which form part of the BBVA Group. This Code sets out the standards of behavior that should be adhered to so that the Group’s conduct towards its customers, colleagues and the society be consistent with BBVA’s values. The BBVA Group Code of Conduct can be found on BBVA’s website at www.bbva.com.

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ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table provides information on the aggregate fees billed by our principal accountants, Deloitte, S.L. and its worldwide affiliates, by type of service rendered for the periods indicated.

	Year ended December 31,
Services Rendered	2016		2015
	(In Millions of Euros)
Audit Fees(1)		26.5		25.8
Audit-Related Fees(2)		3.4		4.3
Tax Fees(3)		0.3		0.9
All Other Fees(4)		1.0		1.6
Total		31.2		32.6

(1) Aggregate fees billed for each of the last two fiscal years for professional services rendered by Deloitte, S.L. and its worldwide affiliates for the audit of BBVA’s annual financial statements or services that are normally provided by Deloitte, S.L. and its worldwide affiliates in connection with statutory and regulatory filings or engagements for those fiscal years.

(2) Aggregate fees billed in each of the last two fiscal years for assurance and related services by Deloitte, S.L. and its worldwide affiliates that are reasonably related to the performance of the audit or review of BBVA’s financial statements and are not reported under (1) above.

(3) Aggregate fees billed in each of the last two fiscal years for professional services rendered by Deloitte, S.L. and its worldwide affiliates for tax compliance, tax advice, and tax planning.

(4) Aggregate fees billed in each of the last two fiscal years for products and services provided by Deloitte, S.L. and its worldwide affiliates other than the services reported in (1), (2) and (3) above. Services in this category consisted primarily of consultancy and implementation of new regulation.

The Audit and Compliance Committee’s Pre-Approval Policies and Procedures

In order to assist in ensuring the independence of our external auditor, the regulations of our Audit and Compliance Committee provides that our external auditor is generally prohibited from providing us with non-audit services, other than under the specific circumstance described below. For this reason, our Audit and Compliance Committee has developed a pre-approval policy regarding the contracting of BBVA’s external auditor, or any affiliate of the external auditor, for professional services. The professional services covered by such policy include audit and non-audit services provided to BBVA or any of its subsidiaries reflected in agreements dated on or after May 6, 2003.

The pre-approval policy is as follows:

1. The hiring of BBVA’s external auditor or any of its affiliates is prohibited, unless there is no other firm available to provide the needed services at a comparable cost and that could deliver a similar level of quality.

2. In the event that there is no other firm available to provide needed services at a comparable cost and delivering a similar level of quality, the external auditor (or any of its affiliates) may be hired to perform such services, but only with the pre-approval of the Audit and Compliance Committee.

3. The Chairman of the Audit and Compliance Committee has been delegated the authority to approve the hiring of BBVA’s external auditor (or any of its affiliates). In such an event, however, the Chairman would be required to inform the Audit and Compliance Committee of such decision at the Committee’s next meeting.

4. The hiring of the external auditor for any of BBVA’s subsidiaries must also be pre-approved by the Audit and Compliance Committee.

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ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not Applicable.

ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

2016	Total Number of Ordinary Shares Purchased		Average Price Paid per Share (or Unit) in Euros		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 to January 31		22,443,607		6.15		—		—
February 1 to February 28		40,511,508		5.64		—		—
March 1 to March 31		21,701,337		6.24		—		—
April 1 to April 30		64,126,561		4.00		—		—
May 1 to May 31		16,855,591		5.63		—		—
June 1 to June 30		30,601,784		5.23		—		—
July 1 to July 31		18,165,926		5.09		—		—
August 1 to August 31		13,628,725		5.12		—		—
September 1 to September 30		52,005,782		4.06		—		—
October 1 to October 31		39,087,086		6.04		—		—
November 1 to November 30		44,254,640		6.15		—		—
December 1 to December 31		16,468,392		6.60		—		—
Total		379,850,939		5.27		—		—

During 2016, we sold a total of 411,537,817 shares for an average price of €5.50 per share.

ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

On July 28, 2016, we announced that the Board of Directors selected KPMG Auditores, S.L. to be the independent registered public accounting firm of Banco Bilbao Vizcaya Argentaria, S.A. and of the BBVA Group for the 2017, 2018 and 2019 fiscal years. Such selection and change of independent registered public accounting firm was adopted at the proposal of the Audit and Compliance Committee. This selection was approved by the shareholders at the annual shareholders’ meeting held on March 17, 2017. Accordingly, Deloitte, S.L. was not re-elected for another term and, on March 17, 2017, it was dismissed as our independent registered public accounting firm.

The report of Deloitte, S.L. on our financial statements for the years ended December 31, 2016 and 2015 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. There was no disagreement whatsoever relating to the years ended December 31, 2016 and 2015 and any subsequent interim period preceding such dismissal with Deloitte, S.L. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of the former auditor, would have caused them to make reference to the subject matter of the disagreement in connection with their report, or any “reportable event” as described in Item 16F(a)(1)(v) of Form 20-F.

We have provided a copy of the above statements to Deloitte, S.L. and requested that Deloitte, S.L. furnish us with a letter addressed to the SEC stating whether or not they agree with the above disclosure. A copy of that letter, dated March 31, 2017, is filed as an exhibit to this Annual Report.

Further, in the two years prior to December 31, 2016, we have not consulted with KPMG Auditores, S.L. regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered with respect to the consolidated financial statements of the BBVA Group; or (ii) any matter that was either the subject of a disagreement as that term is defined in Item 16F(a)(1)(iv) of Form 20-F or a “reportable event” as described in Item 16F(a)(1)(v) of Form 20-F.

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ITEM 16G.  CORPORATE GOVERNANCE

Compliance with NYSE Listing Standards on Corporate Governance

On November 4, 2003, the SEC approved rules proposed by the New York Stock Exchange (the “NYSE”) intended to strengthen corporate governance standards for listed companies. In compliance therewith, the following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the NYSE listing standards.

Independence of the Directors on the Board of Directors and Board Committees

Under the NYSE corporate governance rules, (i) a majority of a U.S. company’s board of directors must be composed of independent directors, (ii) all members of the audit committee must be independent and (iii) all U.S. companies listed on the NYSE must have a compensation committee and a nominations committee and all members of such committees must be independent. In each case, the independence of directors must be established pursuant to highly detailed rules promulgated by the NYSE and, in the case of the audit committee, the NYSE and the SEC.

Spanish Corporate Enterprises Act sets out a definition of what constitutes independence for the purpose of board or committee membership. Such definition is in line with the definition provided by our Board Regulations.

In addition, pursuant to the Spanish Corporate Enterprises Act, listed companies shall have, at least, an audit committee, and an appointments and remuneration committee. This Law also establishes that such committees (i) shall be composed exclusively by non-executive directors, (ii) at least two of their members shall be independent directors and (iii) they shall be chaired by an independent director.

Likewise, Law 10/2014, which completes the transposition of CRD IV into Spanish legislation, includes rules on corporate governance, among others, as regards board committees and their membership, establishing that the remuneration committee, the appointments committee and risk committee shall be composed of non-executive directors and at least one third of their members shall be independent and, in any event, the Chairman of these committees shall also be an independent director.

Moreover, pursuant to the Good Governance Code for Listed Companies of the CNMV, which includes non-binding recommendations applicable to listed companies in Spain, under the comply or explain principle: (i) independent directors must represent, at least, half of the total board members; (ii) the majority of the members of the audit committee and the appointments and remuneration committee must be independent; and (iii) companies with high market capitalization must have two separate committees, an appointments committee and a remuneration committee.

223

Pursuant to article 1 of our Board Regulations, BBVA considers that independent directors are non-executive directors appointed for their personal and professional background who can perform their duties without being constrained by their relations with the Company or its Group, its significant shareholders or its executives. Directors cannot be deemed independent if they:

a) have been employees or executive directors in Group companies, unless three or five years have elapsed, respectively since they ceased as employees or executive directors, as the case may be;

b) receive from the Company or its Group entities, any amount or benefit for an item other than remuneration for their directorship, except where the sum is insignificant and expect further for dividends or pension supplements that a director may receive due to a former professional or employment relationship, provided these are unconditional and, consequently, the company paying them may not at its own discretion, suspend, amend or revoke their accrual unless there has been a breach of duty;

c) are partners of the external auditor or in charge of the audit report or have been so in the last three years, whether the audit in question was carried out on the Company or any other Group entity;

d) are executive directors or senior managers of another company in which a Company’s executive director or senior manager is an external director;

e) maintain any significant business relationship with the Company or with any Group company or have done so over the last year, either in their own name or as a significant shareholder, director or senior manager of a company that maintains or has maintained such a relationship. Business relationship here means any relationship as supplier of goods or services, including financial goods or services, and as advisor or consultant;

f) are significant shareholders, executive directors or senior managers of any entity that receives, or has received over the last three years, donations from the Company or its Group. Those persons who are merely trustees in a foundation receiving donations shall not be deemed to be included under this letter;

g) are spouses, or spousal equivalents or related up to second degree of kinship to an executive director or senior manager of the Company;

h) have not been proposed by the Appointments Committee for appointment or renewal;

i) have held a directorship for a continuous period of more than 12 years; or

j) are related to any significant shareholder or shareholder represented on the Board of Directors under any of the circumstances described under letters (a), (e), (f) or (g) above. In the event of kinship relationships mentioned in letter (g), the limitation will apply not only with respect to the shareholder, but also with respect to their proprietary directors in the company in which the shareholder holds an interest.

Directors who hold shares in the Bank may be considered independent provided they comply with the above conditions and their shareholding is not legally considered to be significant.

As of the date of this Annual Report, our Board of Directors has a large number of non-executive directors and seven out of the 14 members of our Board are independent under the definition of independence described above, which is in line with the definition provided by the Spanish Corporate Enterprises Act.

In addition, our Audit and Compliance Committee is composed exclusively of independent directors, who are not members of the Bank’s Executive Committee and the Committee chairman has experience in accounting, auditing and risk management, in accordance with the specific regulations of the Audit and Compliance Committee. Our Risk Committee is composed exclusively of non-executive directors, and also, in accordance with the Corporate Enterprises Act and with corporate governance non-binding recommendations, our Board of Directors has two separate committees: an Appointments Committee and a Remuneration Committee, which are composed exclusively of non-executive directors, being the majority of them (including their chairman) independent directors.

224

Separate Meetings for Independent Directors

In accordance with the NYSE corporate governance rules, independent directors must meet periodically outside of the presence of the executive directors. Under Spanish law, this requirement is not contemplated as such. We note, however, that our non-executive directors meet periodically outside the presence of our executive directors every time a Committee with oversight functions meets, since these Committees are comprised solely of non- executive directors. Furthermore, the Board of Directors has appointed a Lead Director with powers to coordinate and meet with the non-executive directors, among other faculties conferred by the law and in Article 5 ter of our Board of Directors Regulations. In addition, our independent directors meet outside the presence of our executive directors as often as they deem fit, and usually prior to meetings of the Board of Directors or its Committees.

Code of Ethics

The NYSE listing standards require U.S. companies to adopt a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. For information with respect to BBVA’s code of business conduct and ethics see “Item 16 B. Code of Ethics”.

ITEM 16H.  MINE SAFETY DISCLOSURE

Not Applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of responding to this Item.

ITEM 18. FINANCIAL STATEMENTS

Please see pages F-1 through F-260.

ITEM 19. EXHIBITS

Exhibit Number	Description
1.1	Amended and Restated Bylaws (Estatutos) of the Registrant (English translation).
8.1	Consolidated Companies Composing Registrant (see Appendix I to X to our Consolidated Financial Statements included herein).
10.1	Amended and Restated Shareholders’ Agreement entered into between the Company Doğuş Holding A.Ş., Doğuş Nakliyat ve Ticaret, A.Ş. and Doğuş Araştirma Geliştirme ve Müşavirlik Hizmetleri A.Ş. on November 19, 2014.(*)
10.2	Information on Compensation Plans (**)
12.1	Section 302 Group Executive Chairman Certification.
12.2	Section 302 Chief Executive Officer Certification.
12.3	Section 302 Head of Global Accounting and Information Management Certification.

225

Exhibit Number	Description
13.1	Section 906 Certification.
15.1	Consent of Independent Registered Public Accounting Firm.
15.2	Letter of Deloitte, S.L. dated March 31, 2017 regarding change in the Independent Registered Public Accounting Firm.

(*) Incorporated by reference to BBVA’s Annual Report on Form 20-F for the year ended December 31, 2014. Confidential treatment was requested with respect to certain portions of this agreement. Confidential portions were redacted and separately submitted to the SEC.

(**) Incorporated by reference to BBVA’s report on Form 6-K submitted on February 15, 2017 (SEC Accession No. 0001193125-17-044830).

We will furnish to the Commission, upon request, copies of any unfiled instruments that define the rights of holders of our long-term debt.

226

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and had duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized.

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.
By:	/s/ RICARDO GOMEZ BARREDO
Name:	RICARDO GOMEZ BARREDO
Title:	Global Head of Accounting and Supervisors

Date: March 31, 2017

227

Consolidated financial statements and auditor´s report for the year 2016

Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheet		F-2
Consolidated income statement		F-5
Consolidated statements of recognized income and expenses		F-6
Consolidated statements of changes in equity		F-7
Consolidated statements of cash flows		F-10
NOTES TO THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS
1.	Introduction, basis for the presentation of the consolidated financial statements, internal control of financial information and other information.	F-11
2.	Principles of consolidation, accounting policies and measurement bases applied and recent IFRS pronouncements	F-14
3.	BBVA Group	F-39
4.	Shareholder remuneration system	F-42
5.	Earnings per share	F-45
6.	Operating segment reporting	F-45
7.	Risk management	F-48
8.	Fair value	F-90
9.	Cash, cash balances at centrals and banks and other demands deposits and Financial liabilities measured at amortized cost	F-100
10.	Financial assets and liabilities held for trading	F-100
11.	Financial assets and liabilities designated at fair value through profit or loss	F-105
12.	Available-for-sale financial assets	F-105
13.	Loans and receivables	F-112
14.	Held-to-maturity investments	F-115
15.	Hedging derivatives and fair value changes of the hedged items in portfolio hedge of interest rate risk	F-117
16.	Investments in subsidiaries, joint ventures and associates	F-121
17.	Tangible assets	F-123
18.	Intangible assets	F-126
19.	Tax assets and liabilities	F-130
20.	Other assets and liabilities	F-134
21.	Non-current assets and disposal groups classified as held for sale	F-135
22.	Financial liabilities at amortized cost	F-137
23.	Liabilities under reinsurance and insurance contracts	F-143
24.	Provisions	F-144
25.	Post-employment and other employee benefit commitments	F-146
26.	Common stock	F-154
27.	Share premium	F-156
28.	Retained earnings, revaluation reserves and other reserves	F-157
29.	Treasury shares	F-159
30.	Accumulated other comprehensive income	F-160
31.	Non-controlling interests	F-160
32.	Capital base and capital management	F-161
33.	Commitments and guarantees given	F-164
34.	Other contingent assets and liabilities	F-164
35.	Purchase and sale commitments and future payment obligations	F-165

36.	Transactions on behalf of third parties	F-165
37.	Interest income and expense	F-166
38.	Dividend income	F-168
39.	Share of profit or loss of entities accounted for using the equity method	F-169
40.	Fee and commission income and expenses	F-169
41.	Gains (losses) on financial assets and liabilities (net) and Exchange Differences	F-170
42.	Other operating income and expenses	F-171
43.	Insurance and reinsurance contracts incomes and expenses	F-172
44.	Administration costs	F-172
45.	Depreciation	F-175
46.	Provisions or reversal of provisions	F-176
47.	Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss	F-176
48.	Impairment or reversal of impairment on non-financial assets	F-176
49.	Gains (losses) on derecognition of non financial assets and subsidiaries, net	F-177
50.	Profit or loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	F-177
51.	Consolidated statements of cash flows	F-177
52.	Accountant fees and services	F-178
53.	Related-party transactions	F-178
54.	Remuneration and other benefits received by the Board of Directors and members of the Bank’s Senior Management	F-180
55.	Other information	F-184
56.	Subsequent events	F-186
APPENDIX I Additional information on consolidated subsidiaries and consolidated structured entities composing the BBVA Group		F-188
APPENDIX II Additional information on investments in subsidiaries, joint ventures and associates in the BBVA Group		F-198
APPENDIX III Changes and notification of investments and divestments in the BBVA Group in the year ended December 31, 2016		F-199
APPENDIX IV Fully consolidated subsidiaries with more than 10% owned by non-Group shareholders as of December 31, 2016		F-204
APPENDIX V BBVA Group’s structured entities. Securitization funds		F-205
APPENDIX VI Details of the outstanding subordinated debt and preferred securities issued by the Bank or entities in the Group consolidated as of December 31, 2016, 2015 and 2014.		F-206
APPENDIX VII Consolidated balance sheets held in foreign currency as of December 31, 2016, 2015 and 2014.		F-210
APPENDIX VIII Information on data derived from the special accounting registry		F-211
APPENDIX IX Quantitative information on refinancing and restructuring operations and other requirement under Bank of Spain Circular 6/2012		F-217
APPENDIX X Additional information on Risk Concentration		F-229
APPENDIX  XI Information in accordance with Article 89 of Directive 2013/36/EU of the European Parliament and its application to Spanish Law through Law 10/2014		F-243
APPENDIX XII Reconciliation of Financial Statements		F-245

GLOSSARY

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Banco Bilbao Vizcaya Argentaria, S.A.:

We have audited the accompanying consolidated balance sheets of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (the “Company”) and subsidiaries composing the BANCO BILBAO VIZCAYA ARGENTARIA Group (the “Group” - Note 3) as of December 31, 2016, 2015 and 2014, and the related consolidated income statements, statements of recognized income and expenses, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Group’s Directors. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. and subsidiaries composing the BANCO BILBAO VIZCAYA ARGENTARIA Group as of December 31, 2016, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with the International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS – IASB”).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2017 expressed an unqualified opinion on the Group’s internal control over financial reporting.

DELOITTE, S.L.

Madrid, Spain

March 31, 2017

F-1

Consolidated balance sheets as of December 31, 2016, 2015 and 2014

		Millions of Euros
ASSETS	Notes	2016		2015		2014
CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS	9		40,039		29,282		27,719
FINANCIAL ASSETS HELD FOR TRADING	10		74,950		78,326		83,258
Derivatives			42,955		40,902		44,229
Equity instruments			4,675		4,534		5,017
Debt securities			27,166		32,825		33,883
Loans and advances to central banks			-		-		-
Loans and advances to credit institutions			-		-		-
Loans and advances to customers			154		65		128
FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS	11		2,062		2,311		2,761
Equity instruments			1,920		2,075		2,024
Debt securities			142		173		737
Loans and advances to central banks			-		-		-
Loans and advances to credit institutions			-		62		-
Loans and advances to customers			-		-		-
AVAILABLE-FOR-SALE FINANCIAL ASSETS	12		79,221		113,426		94,875
Equity instruments			4,641		5,116		7,267
Debt securities			74,580		108,310		87,608
LOANS AND RECEIVABLES	13		465,977		471,828		376,086
Debt securities			11,209		10,516		6,659
Loans and advances to central banks			8,894		17,830		5,429
Loans and advances to credit institutions			31,373		29,317		25,342
Loans and advances to customers			414,500		414,165		338,657
HELD-TO-MATURITY INVESTMENTS	14		17,696		-		-
HEDGING DERIVATIVES	15		2,833		3,538		2,551
FAIR VALUE CHANGES OF THE HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK	15		17		45		121
INVESTMENTS IN SUBSIDARIES, JOINT VENTURES AND ASSOCIATES	16		765		879		4,509
Joint ventures			229		243		4,092
Associates			536		636		417
INSURANCE OR REINSURANCE ASSETS	23		447		511		559
TANGIBLE ASSETS	17		8,941		9,944		7,820
Property, plants and equipment			8,250		8,477		6,428
For own use			7,519		8,021		5,985
Other assets leased out under an operating lease			732		456		443
Investment properties			691		1,467		1,392
INTANGIBLE ASSETS	18		9,786		10,052		7,371
Goodwill			6,937		6,915		5,697
Other intangible assets			2,849		3,137		1,673
TAX ASSETS	19		18,245		17,779		12,426
Current			1,853		1,901		2,035
Deferred			16,391		15,878		10,391
OTHER ASSETS	20		7,274		8,565		8,094
Insurance contracts linked to pensions			-		-		-
Inventories			3,298		4,303		4,443
Rest			3,976		4,263		3,651
NON-CURRENT ASSETS AND DISPOSAL GROUPS HELD FOR SALE	21		3,603		3,369		3,793
TOTAL ASSETS			731,856		749,855		631,942

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the consolidated balance sheets.

F-2

Consolidated balance sheets as of December 31, 2016, 2015 and 2014.

			Millions of Euros
LIABILITIES AND EQUITY	Notes		2016		2015		2014
FINANCIAL LIABILITIES HELD FOR TRADING		10		54,675		55,202		56,798
Trading derivatives				43,118		42,149		45,052
Short positions				11,556		13,053		11,747
Deposits from central banks				-		-		-
Deposits from credit institutions				-		-		-
Customer deposits				-		-		-
Debt certificates				-		-		-
Other financial liabilities				-		-		-
FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS		11		2,338		2,649		2,724
Deposits from central banks				-		-		-
Deposits from credit institutions				-		-		-
Customer deposits				-		-		-
Debt certificates				-		-		-
Other financial liabilities				2,338		2,649		2,724
FINANCIAL LIABILITIES AT AMORTIZED COST		22		589,210		606,113		491,899
Deposits from central banks				34,740		40,087		28,193
Deposits from credit institutions				63,501		68,543		65,168
Customer deposits				401,465		403,362		319,334
Debt certificates				76,375		81,980		71,917
Other financial liabilities				13,129		12,141		7,288
HEDGING DERIVATIVES		15		2,347		2,726		2,331
FAIR VALUE CHANGES OF THE HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK		15		-		358		-
LIABILITIES UNDER INSURANCE CONTRACTS		23		9,139		9,407		10,460
PROVISIONS		24		9,071		8,852		7,444
Provisions for pensions and similar obligations		25		6,025		6,299		5,970
Other long term employee benefits				69		68		62
Provisions for taxes and other legal contingencies				418		616		262
Provisions for contingent risks and commitments				950		714		381
Other provisions				1,609		1,155		769
TAX LIABILITIES		19		4,668		4,656		4,157
Current				1,276		1,238		980
Deferred				3,392		3,418		3,177
OTHER LIABILITIES		20		4,979		4,610		4,519
LIABILITIES INCLUDED IN DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE				-		-		-
TOTAL LIABILITIES				676,428		694,573		580,333

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the consolidated balance sheets.

F-3

Consolidated balance sheets as of December 31, 2016, 2015 and 2014.

			Millions of Euros
LIABILITIES AND EQUITY (Continued)	Notes		2016		2015		2014
SHAREHOLDERS’ FUNDS				52,821		50,639		49,446
Capital		26		3,218		3,120		3,024
Paid up capital				3,218		3,120		3,024
Unpaid capital which has been called up				-		-		-
Share premium		27		23,992		23,992		23,992
Equity instruments issued other than capital				-		-		-
Other equity		44.1.1		54		35		67
Retained earnings		28		23,688		22,588		20,280
Revaluation reserves		28		20		22		23
Other reserves		28		(67)		(98)		633
Reserves or accumulated losses of investments in subsidaries, joint ventures and associates				(67)		(98)		633
Other				-		-		-
Less: Treasury shares		29		(48)		(309)		(350)
Profit or loss attributable to owners of the parent				3,475		2,642		2,618
Less: Interim dividends		4		(1,510)		(1,352)		(841)
ACCUMULATED OTHER COMPREHENSIVE INCOME		30		(5,458)		(3,349)		(348)
Items that will not be reclassified to profit or loss				(1,095)		(859)		(777)
Actuarial gains or (-) losses on defined benefit pension plans				(1,095)		(859)		(777)
Non-current assets and disposal groups classified as held for sale				-		-		-
Share of other recognised income and expense of investments in subsidaries, joint ventures and associates				-		-		-
Other adjustments				-		-		-
Items that may be reclassified to profit or loss				(4,363)		(2,490)		429
Hedge of net investments in foreign operations [effective portion]				(118)		(274)		(373)
Foreign currency translation				(5,185)		(3,905)		(2,173)
Hedging derivatives. Cash flow hedges [effective portion]				16		(49)		(46)
Available-for-sale financial assets				947		1,674		3,816
Non-current assets and disposal groups classified as held for sale				-		-		-
Share of other recognised income and expense of investments in subsidaries, joint ventures and associates				(23)		64		(796)
MINORITY INTERESTS (NON-CONTROLLING INTEREST)		31		8,064		7,992		2,511
Valuation adjustments				(2,246)		(1,333)		(53)
Rest				10,310		9,325		2,563
TOTAL EQUITY				55,428		55,282		51,609
TOTAL EQUITY AND TOTAL LIABILITIES				731,856		749,855		631,942
			Millions of Euros
MEMORANDUM ITEM (OFF-BALANCE SHEET EXPOSURES)	Notes		2016		2015		2014
Financial guarantees given		33		50,540		49,876		33,741
Contingent commitments		33		117,573		135,733		106,252

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the consolidated balance sheets.

F-4

Consolidated income statements for the years ended December 31, 2016, 2015 and 2014.

			Millions of Euros
Consolidated income statements	Notes		2016		2015		2014
Interest income		37		27,708		24,783		22,838
Interest expenses		37		(10,648)		(8,761)		(8,456)
NET INTEREST INCOME				17,059		16,022		14,382
Dividend income		38		467		415		531
Share of profit or loss of entities accounted for using the equity method		39		25		174		343
Fee and commission income		40		6,804		6,340		5,530
Fee and commission expenses		40		(2,086)		(1,729)		(1,356)
Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net		41		1,375		1,055		1,439
Gains or (-) losses on financial assets and liabilities held for trading, net		41		248		(409)		11
Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net		41		114		126		32
Gains or (-) losses from hedge accounting, net		41		(76)		93		(47)
Exchange differences (net)		41		472		1,165		699
Other operating income		42		1,272		1,315		959
Other operating expenses		42		(2,128)		(2,285)		(2,705)
Income on insurance and reinsurance contracts		43		3,652		3,678		3,622
Expenses on insurance and reinsurance contracts		43		(2,545)		(2,599)		(2,714)
GROSS INCOME				24,653		23,362		20,725
Administration costs		44		(11,366)		(10,836)		(9,414)
Personnel expenses				(6,722)		(6,273)		(5,410)
Other administrative expenses				(4,644)		(4,563)		(4,004)
Depreciation		45		(1,426)		(1,272)		(1,145)
Provisions or (-) reversal of provisions		46		(1,186)		(731)		(1,142)
Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss		47		(3,801)		(4,272)		(4,340)
Financial assets measured at cost				-		-
Available- for-sale financial assets				(202)		(23)		(35)
Loans and receivables				(3,597)		(4,248)		(4,304)
Held to maturity investments				(1)		-		-
NET OPERATING INCOME				6,874		6,251		4,684
Impairment or (-) reversal of impairment of investments in subsidaries, joint ventures and associates				-		-		-
Impairment or (-) reversal of impairment on non-financial assets		48		(521)		(273)		(297)
Tangible assets				(143)		(60)		(97)
Intangible assets				(3)		(4)		(8)
Other assets				(375)		(209)		(192)
Gains (losses) on derecognition of non financial assets and subsidiaries, net		49		70		(2,135)		46
Negative goodwill recognised in profit or loss		18		-		26		-
Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations		50		(31)		734		(453)
OPERATING PROFIT BEFORE TAX				6,392		4,603		3,980
Tax expense or (-) income related to profit or loss from continuing operation		19		(1,699)		(1,274)		(898)
PROFIT FROM CONTINUING OPERATIONS				4,693		3,328		3,082
Profit from discontinued operations (net)				-		-		-
PROFIT				4,693		3,328		3,082
Attributable to minority interest [non-controlling interests]		31		1,218		686		464
Attributable to owners of the parent				3,475		2,642		2,618
			Euros
	Notas		2016		2015		2014
EARNINGS PER SHARE		5		0.50		0.37		0.40
Basic earnings per share from continued operations				0.50		0.37		0.40
Diluted earnings per share from continued operations				0.50		0.37		0.40
Basic earnings per share from discontinued operations				-		-		-
Diluted earnings per share from discontinued operations				-		-		-

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the consolidated income statements.

F-5

Consolidated statements of recognized income and expenses for the years ended December 31, 2016, 2015 and 2014.

	Millions of Euros
Consolidated statements of recognized income and expenses	2016		2015		2014
PROFIT RECOGNIZED IN INCOME STATEMENT		4,693		3,328		3,082
OTHER RECOGNIZED INCOME (EXPENSES)		(3,022)		(4,280)		3,359
ITEMS NOT SUBJECT TO RECLASSIFICATION TO INCOME STATEMENT		(240)		(74)		(346)
Actuarial gains and losses from defined benefit pension plans		(303)		(135)		(498)
Non-current assets available for sale		-		-		-
Entities under the equity method of accounting		-		8		(5)
Income tax related to items not subject to reclassification to income statement		63		53		157
ITEMS SUBJECT TO RECLASSIFICATION TO INCOME STATEMENT		(2,782)		(4,206)		3,705
Hedge of net investments in foreign operations [effective portion]		166		88		(273)
Valuation gains or (-) losses taken to equity		166		88		(273)
Transferred to profit or loss		-		-		-
Other reclassifications		-		-		-
Foreign currency translation		(2,167)		(2,911)		760
Valuation gains or (-) losses taken to equity		(2,120)		(3,154)		761
Transferred to profit or loss		(47)		243		(1)
Other reclassifications		-		-		-
Cash flow hedges [effective portion]		80		4		(71)
Valuation gains or (-) losses taken to equity		134		47		(71)
Transferred to profit or loss		(54)		(43)		-
Transferred to initial carrying amount of hedged items		-		-		-
Other reclassifications		-		-		-
Available-for-sale financial assets		(694)		(3,196)		4,306
Valuation gains or (-) losses taken to equity		438		(1,341)		5,706
Transferred to profit or loss		(1,248)		(1,855)		(1,400)
Other reclassifications		116		-		-
Non-current assets held for sale		-		-		(4)
Valuation gains or (-) losses taken to equity		-		-		(4)
Transferred to profit or loss		-		-		-
Other reclassifications		-		-		-
Entities accounted for using the equity method		(89)		861		338
Income tax		(78)		948		(1,351)
TOTAL RECOGNIZED INCOME/EXPENSES		1,671		(952)		6,441
Attributable to minority interest [non-controlling interests]		305		(594)		341
Attributable to the parent company		1,366		(358)		6,100

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the consolidated statements of recognized income and expenses for the years ended December 31, 2016, 2015 and 2014.

F-6

Consolidated statements of changes in equity for the years ended December 31, 2016, 2015 and 2014.

	Millions of Euros
	Capital (Nota 26)		Share Premium (Note 27)		Equity instruments issued other than capital		Other Equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury  shares		Profit or loss attributable to owners of the parent		Interim dividends		Accumulated other comprehensive income		Non-controlling interest				Total
2016																							Valuation adjustments		Rest
Balances as of January 1, 2016		3,120		23,992		-		35		22,588		22		(98)		(309)		2,642		(1,352)		(3,349)		(1,333)		9,325		55,281
Total income/expense recognized		-		-		-		-		-		-		-		-		3,475		-		(2,109)		(913)		1,218		1,671
Other changes in equity		98		-		-		19		1,100		(2)		31		260		(2,642)		(158)		-		-		(233)		(1,526)
Issuances of common shares		98		-		-		-		(98)		-		-		-		-		-		-		-		-		-
Issuances of preferred shares		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Issuance of other equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Period or maturity of other issued equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Conversion of debt on equity		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Common Stock reduction		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Dividend distribution		-		-		-		-		93		-		(93)		-		-		(1,301)		-		-		(234)		(1,535)
Purchase of treasury shares		-		-		-		-		-		-		-		(2,004)		-		-		-		-		-		(2,004)
Sale or cancellation of treasury shares		-		-		-		-		(30)		-		-		2,264		-		-		-		-		-		2,234
Reclassification of financial liabilities to other equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Reclassification of other equity instruments to financial liabilities		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Transfers between total equity entries		-		-		-		-		1,166		(2)		126		-		(2,642)		1,352		-		-		-		-
Increase/Reduction of equity due to business combinations		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Share based payments		-		-		-		(16)		3		-		-		-		-		-		-		-		-		(12)
Other increases or (-) decreases in equity		-		-		-		35		(34)		-		(2)		-		-		(210)		-		-		2		(209)
Balances as of December 31, 2016		3,218		23,992		-		54		23,688		20		(67)		(48)		3,475		(1,510)		(5,458)		(2,246)		10,310		55,428

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the total consolidated statements of changes in equity.

F-7

Consolidated statements of changes in equity for the years ended December 31, 2016, 2015 and 2014. (continued).

	Millions of Euros
	Capital (Note 26)		Share Premium (Note 27)		Equity instruments issued other than capital		Other Equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury  shares		Profit or loss attributable to owners of the parent		Interim   dividends		Accumulated other comprehensive income		Non-controlling interest				Total
2015																							Valuation adjustments		Rest
Balances as of January 1, 2015		3,024		23,992		-		66		20,281		23		633		(350)		2,618		(841)		(348)		(53)		2,563		51,609
Total income/expense recognized		-		-		-		-		-		-		-		-		2,642		-		(3,000)		(1,280)		686		(953)
Other changes in equity		96		-		-		(32)		2,308		(1)		(731)		41		(2,618)		(512)		-		-		6,075		4,626
Issuances of common shares		96		-		-		-		(96)		-		-		-		-		-		-		-		-		-
Issuances of preferred shares		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Issuance of other equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Period or maturity of other issued equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Conversion of debt on equity		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Common Stock reduction		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Dividend distribution		-		-		-		-		86		-		(86)		-		-		(1,222)		-		-		(146)		(1,368)
Purchase of treasury shares		-		-		-		-		-		-		-		(3,278)		-		-		-		-		-		(3,278)
Sale or cancellation of treasury shares		-		-		-		-		6		-		-		3,319		-		-		-		-		-		3,325
Reclassification of financial liabilities to other equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Reclassification of other equity instruments to financial liabilities		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Transfers between total equity entries		-		-		-		-		2,423		(1)		(645)		-		(2,618)		841		-		-		-		-
Increase/Reduction of equity due to business combinations		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Share based payments		-		-		-		(48)		14		-		-		-		-		-		-		-		-		(34)
Other increases or (-) decreases in equity		-		-		-		16		(126)		-		-		-		-		(131)		-		-		6,221		5,980
Balances as of December 31, 2015		3,120		23,992		-		35		22,588		22		(98)		(309)		2,642		(1,352)		(3,349)		(1,333)		9,325		55,281

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the total consolidated statements of changes in equity.

F-8

Consolidated statements of changes in equity for the years ended December 31, 2016, 2015 and 2014. (continued).

	Millions of Euros
	Capital (Note 26)		Share Premium (Note 27)		Equity instruments issued other than capital		Other Equity		Retained earnings		Revaluation reserves		Other reserves		(-) Treasury  shares		Profit or loss attributable to owners of the parent		Interim dividends		Accumulated other comprehensive income		Non-controlling interest				Total
2014																							Valuation adjustments		Rest
Balances as of January 1, 2014		2,835		22,111		-		59		19,291		26		450		(66)		2,084		(765)		(3,831)		70		2,301		44,565
Total income/expense recognized		-		-		-		-		-		-		-		-		2,618		-		3,483		(123)		464		6,442
Other changes in equity		189		1,881		-		8		989		(2)		182		(284)		(2,084)		(76)		-		-		(201)		602
Issuances of common shares		189		1,881		-		-		(70)		-		-		-		-		-		-		-		-		2,000
Issuances of preferred shares		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Issuance of other equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Period or maturity of other issued equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Conversion of debt on equity		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Common Stock reduction		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Dividend distribution		-		-		-		-		91		-		(91)		-		-		(597)		-		-		(243)		(840)
Purchase of treasury shares		-		-		-		-		-		-		-		(3,770)		-		-		-		-		-		(3,770)
Sale or cancellation of treasury shares		-		-		-		-		5		-		-		3,486		-		-		-		-		-		3,491
Reclassification of financial liabilities to other equity instruments		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Reclassification of other equity instruments to financial liabilities		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Transfers between total equity entries		-		-		-		-		1,044		(2)		277		-		(2,084)		765		-		-		-		-
Increase/Reduction of equity due to business combinations		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Share based payments		-		-		-		(36)		7		-		-		-		-		-		-		-		-		(29)
Other increases or (-) decreases in equity		-		-		-		44		(88)		-		(4)		-		-		(244)		-		-		42		(250)
Balances as of December 31, 2014		3,024		23,992		-		67		20,280		23		633		(350)		2,618		(841)		(348)		(53)		2,563		51,609

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the total consolidated statements of changes in equity.

F-9

Consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014.

			Millions of Euros
Consolidated statements of cash flow	Notes		2016		2015		2014
A) CASH FLOW FROM OPERATING ACTIVITIES (1 + 2 + 3 + 4 + 5)		51		6,623		23,101		(6,188)
1. Profit for the year				4,693		3,328		3,082
2. Adjustments to obtain the cash flow from operating activities:				6,784		18,327		8,315
Depreciation and amortization				1,426		1,272		1,145
Other adjustments				5,358		17,055		7,170
3. Net increase/decrease in operating assets				(4,428)		(12,954)		(53,244)
Financial assets held for trading				1,289		4,691		(11,145)
Other financial assets designated at fair value through profit or loss				(2)		337		(349)
Available-for-sale financial assets				14,445		3,360		(13,485)
Loans and receivables				(21,075)		(20,498)		(27,299)
Other operating assets				915		(844)		(966)
4. Net increase/decrease in operating liabilities				1,273		15,674		36,557
Financial liabilities held for trading				361		(2,475)		11,151
Other financial liabilities designated at fair value through profit or loss				(53)		120		256
Financial liabilities at amortized cost				(7)		21,422		24,219
Other operating liabilities				972		(3,393)		931
5. Collection/Payments for income tax				(1,699)		(1,274)		(898)
B) CASH FLOWS FROM INVESTING ACTIVITIES (1 + 2)		51		(560)		(4,411)		(1,151)
1. Investment				(3,978)		(6,416)		(1,984)
Tangible assets				(1,312)		(2,171)		(1,419)
Intangible assets				(645)		(571)		(467)
Investments in joint ventures and associates				(76)		(41)		-
Subsidiaries and other business units				(95)		(3,633)		(98)
Non-current assets held for sale and associated liabilities				-		-		-
Held-to-maturity investments				(1,850)		-		-
Other settlements related to investing activities				-		-		-
2. Divestments				3,418		2,005		833
Tangible assets				795		224		167
Intangible assets				20		2		-
Investments in joint ventures and associates				322		1		118
Subsidiaries and other business units				73		9		-
Non-current assets held for sale and associated liabilities				900		1,683		548
Held-to-maturity investments				1,215		-		-
Other collections related to investing activities				93		86		-
C) CASH FLOWS FROM FINANCING ACTIVITIES (1 + 2)		51		(1,113)		127		3,157
1. Investment				(4,335)		(5,717)		(5,955)
Dividends				(1,599)		(879)		(826)
Subordinated liabilities				(502)		(1,419)		(1,046)
Treasury stock amortization				-		-		-
Treasury stock acquisition				(2,004)		(3,273)		(3,770)
Other items relating to financing activities				(230)		(146)		(313)
2. Divestments				3,222		5,844		9,112
Subordinated liabilities				1,000		2,523		3,628
Treasury stock increase				-		-		2,000
Treasury stock disposal				2,222		3,321		3,484
Other items relating to financing activities				-		-		-
D) EFFECT OF EXCHANGE RATE CHANGES				(3,463)		(6,781)		725
E) NET INCREASE/DECREASE IN CASH OR CASH EQUIVALENTS (A+B+C+D)				1,489		12,036		(3,457)
F) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR				43,466		31,430		34,887
G) CASH AND CASH EQUIVALENTS AT END OF THE PERIOD (E+F)				44,955		43,466		31,430
			Millones de euros
(Continued)	Notas		2016		2015		2014
Cash				7,413		7,192		6,247
Balance of cash equivalent in central banks (*)				37,542		36,275		25,183
Other financial assets				-		-		-
Less: Bank overdraft refundable on demand				-		-		-
TOTAL CASH AND CASH EQUIVALENTS AT END OF THE PERIOD		9,13		44,955		43,466		31,430

(*) “Balance of cash equivalent in central banks” includes short term deposits in central banks in the heading “Loans and receivables” in the accompanying consolidated financial statements (see Note 13).

The accompanying Notes 1 to 56 and Appendices I to XII are an integral part of the consolidated statement of cash flows for the year ended December 31, 2016, 2015 and 2014.

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Notes to the consolidated financial statements

1. Introduction, basis for the presentation of the consolidated financial statements, internal control of financial information and other information.

1.1 Introduction

Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter “the Bank” or “BBVA”) is a private-law entity subject to the laws and regulations governing banking entities operating in Spain. It carries out its activity through branches and agencies across the country and abroad.

The Bylaws and other public information are available for inspection at the Bank’s registered address (Plaza San Nicolás, 4 Bilbao) as on its web site (www.bbva.com).

In addition to the activities it carries out directly, the Bank heads a group of subsidiaries, joint venture and associates which perform a wide range of activities and which together with the Bank constitute the Banco Bilbao Vizcaya Argentaria Group (hereinafter, “the Group” or “the BBVA Group”). In addition to its own separate financial statements, the Bank is therefore required to prepare the Group’s consolidated financial statements.

As of December 31, 2016, the BBVA Group had 370 consolidated entities and 89 entities accounted for using the equity method (see Notes 3 and 16 and Appendix I to V).

These consolidated financial statements for the year ended December 31, 2016, have been authorized for issue on March 31, 2017.

1.2 Basis for the presentation of the consolidated financial statements

The BBVA Group’s consolidated financial statements are presented in accordance with the International Financial Reporting Standards endorsed by the European Union (hereinafter, “EU-IFRS”) applicable as of December 31, 2016, considering the Bank of Spain Circular 4/2004, of 22 December (and as amended thereafter), and with any other legislation governing financial reporting applicable to the Group and in compliance with IFRS-IASB.

The BBVA Group’s accompanying consolidated financial statements for the year ended December 31, 2016 were prepared by the Group’s Directors (through the Board of Directors held on February 9, 2017) by applying the principles of consolidation, accounting policies and valuation criteria described in Note 2, so that they present fairly the Group’s total consolidated equity and financial position as of December 31, 2016, together with the consolidated results of its operations and cash flows generated during the year ended December 31, 2016.

These consolidated financial statements were prepared on the basis of the accounting records kept by the Bank and each of the other entities in the Group. Moreover, they include the adjustments and reclassifications required to harmonize the accounting policies and valuation criteria used by the Group (see Note 2.2).

All effective accounting standards and valuation criteria with a significant effect in the consolidated financial statements were applied in their preparation.

The amounts reflected in the accompanying consolidated financial statements are presented in millions of euros, unless it is more appropriate to use smaller units. Some items that appear without a total in these consolidated financial statements do so because of how the units are expressed. Also, in presenting amounts in millions of euros, the accounting balances have been rounded up or down. It is therefore possible that the totals appearing in some tables are not the exact arithmetical sum of their component figures.

The percentage changes in amounts have been calculated using figures expressed in thousands of euros.

1.3 Comparative information

The consolidated financial statements of BBVA Group for the year 2016 are prepared in accordance with the presentation models required by Circular 5/2015 of the Comisión Nacional del Mercado de Valores. The aim is to

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adapt the content of the public financial information from the credit institutions and formats of the financial statements established mandatory by the European Union regulation for the credit institution.

The financial statements and the information referred of those dates of 2015 and 2014, has been restated according to the new models mentioned in the previous paragraph. As shown in Appendix XII attached, the presentation of the consolidated financial statements in accordance with these new formats has no significant impact on the financial statements included in the consolidated financial statements for the years ended December 31, 2015 and 2014.

Certain financial information for the year 2015 has been restated, with no significant impact, as a result of the end in 2016 of the purchase accounting period related to the Garanti Group acquisition (July 2015), as required by IFRS 3 “Business Combinations” paragraph 49 (see Note 18).

Likewise, during 2016, the BBVA Group operating segments have not been significant changes with regard to the existing structure in 2015 (Note 6). The information related to operating segments as of December 31, 2015 and 2014 has been restated for comparability purposes, as required by IFRS 8 “Operating segments”.

1.4 Seasonal nature of income and expenses

The nature of the most significant activities carried out by the BBVA Group’s entities is mainly related to traditional activities carried out by financial institutions, which are not significantly affected by seasonal factors within the same year.

1.5 Responsibility for the information and for the estimates made

The information contained in the BBVA Group’s consolidated financial statements is the responsibility of the Group’s Directors.

Estimates have to be made at times when preparing these consolidated financial statements in order to calculate the recorded amount of some assets, liabilities, income, expenses and commitments. These estimates relate mainly to the following:

· Impairment on certain financial assets (see Notes 7, 12, 13, 14 and 16).

· The assumptions used to quantify certain provisions (see Notes 24 and 25) and for the actuarial calculation of post-employment benefit liabilities and commitments (see Note 25).

· The useful life and impairment losses of tangible and intangible assets (see Notes 17, 18, 20 and 21).

· The valuation of goodwill and price allocation of business combinations (see Note 18).

· The fair value of certain unlisted financial assets and liabilities (see Notes 7, 8, 10, 11 and 12).

· The recoverability of deferred tax assets (See Note 19).

· The Exchange rate and the inflation rate of Venezuela (see Notes 2.2.16 and 2.2.20).

Although these estimates were made on the basis of the best information available as of December 31, 2016 on the events analyzed, future events may make it necessary to modify them (either up or down) over the coming years. This would be done prospectively in accordance with applicable standards, recognizing the effects of changes in the estimates in the corresponding consolidated income statement.

1.6 BBVA Group’s Internal Control over financial reporting

The financial information prepared by the BBVA Group is subject to an Internal Control over Financial Reporting (hereinafter “ICFR”), which provides reasonable assurance with respect to its reliability and the integrity of the consolidated financial information. It is also aimed to ensure that the transactions are processed in accordance with the applicable laws and regulations.

The ICFR was developed by the BBVA Group’s management in accordance with the framework established by the “Committee of Sponsoring Organizations of the Treadway Commission” (hereinafter, “COSO”). The COSO framework sets five components that constitute the basis of the effectiveness and efficiency of the internal control systems:

· The establishment of an appropriate control framework.

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· The assessment of the risks that could arise during the preparation of the financial information.

· The design of the necessary controls to mitigate the identified risks.

· The establishment of an appropriate system of information to detect and report system weaknesses.

· The monitoring of the controls to ensure they perform correctly and are effective over time.

The ICFR is a dynamic model that evolves continuously over time to reflect the reality of the BBVA Group’s businesses, processes, risks and controls designed to mitigate them. It is subject to a continuous evaluation by the internal control units located in the different entities of BBVA Group.

These internal control units are integrated within the BBVA internal control model which is based in two pillars:

· A control system organized into three lines of defense:

– The first line are integrated by the business units, which are responsible for identifying risks associated with their processes and to execute the controls established to mitigate them.

– The second line comprises the specialized control units (Legal Compliance, Global Accounting & Information Management/Internal Financial Control, Internal Risk Control, IT Risk, Fraud & Security, and Operations Control among others). This second line defines the models and control policies under their areas of responsibility and monitors the design and the correct implementation and effectiveness of the controls.

– The third line is the Internal Audit unit, which conducts an independent review of the model, verifying the compliance and effectiveness of the model.

· A set of committees called Corporate Assurance that helps to escalate the internal control issues to the management at a Group level and also in each of the countries where the Group operates.

The internal control units comply with a common and standard methodology established at Group level, as set out in the following diagram:

The Internal Control Units, ICFR Model is subject to annual evaluations by the Group’s Internal Audit Unit and external auditors. It is also supervised by the Audit and Compliance Committee of the Bank’s Board of Directors.

The BBVA Group also complies with the requirements of the Sarbanes-Oxley Act (hereafter “SOX”) for consolidated financial statements as a listed company in the U.S. Securities and Exchange Commission (“SEC”). The main senior executives of the Group take part in the design, compliance and implementation of the internal control model to make it efficient and to ensure the quality and accuracy of the financial information.

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1.7 Mortgage market policies and procedures

The information on “Mortgage market policies and procedures” (for the granting of mortgage loans and for debt issues secured by such mortgage loans) required by Bank of Spain Circular 5/2011, applying Royal Decree 716/2009, dated April 24 (which developed certain aspects of Act 2/1981, dated March 25, on the regulation of the mortgage market and other mortgage and financial market regulations), can be found in Appendix VIII.

2. Principles of consolidation, accounting policies and measurement bases applied and recent IFRS pronouncements

The Glossary includes the definition of some of the financial and economic terms used in Note 2 and subsequent Notes.

2.1 Principles of consolidation

In terms of its consolidation, in accordance with the criteria established by the IFRS, the BBVA Group is made up of four types of entities: subsidiaries, joint ventures, associates and structured entities, defined as follows:

· Subsidiaries

Subsidiaries are entities controlled by the Group (for definition of the criterion for control, see Glossary).The financial statements of the subsidiaries are fully consolidated with those of the Bank. The share of non-controlling interests from subsidiaries in the Group’s consolidated total equity is presented under the heading “Non-controlling interests” in the consolidated balance sheet. Their share in the profit or loss for the period or year is presented under the heading “Attributable to minority interest” in the accompanying consolidated income statement (see Note 31).

Note 3 includes information related to the main subsidiaries in the Group as of December 31, 2016. Appendix I includes other significant information on these entities.

· Joint ventures

Joint ventures are those entities over which there is a joint arrangement to joint control with third parties other than the Group (for definitions of joint arrangement, joint control and joint venture, refer to Glossary).

The investments in joint ventures are accounted for using the equity method (see Note 16). Appendix II shows the main figures for joint ventures accounted for using the equity method.

· Associates

Associates are entities in which the Group is able to exercise significant influence (for definition of significant influence, see Glossary). Significant influence is deemed to exist when the Group owns 20% or more of the voting rights of an investee directly or indirectly, unless it can be clearly demonstrated that this is not the case.

However, certain entities in which the Group owns 20% or more of the voting rights are not included as Group associates, since the Group does not have the ability to exercise significant influence over these entities. Investments in these entities, which do not represent material amounts for the Group, are classified as “Available-for-sale financial assets”.

In contrast, some investments in entities in which the Group holds less than 20% of the voting rights are accounted for as Group associates, as the Group is considered to have the ability to exercise significant influence over these entities. As of December 31, 2016, these entities are not significant in the Group.

Appendix II shows the most significant information related to the associates (see Note 16), which are accounted for using the equity method.

· Structured Entities

A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when the voting rights relate to administrative matters only and the relevant activities are directed by means of contractual arrangements (see Glossary).

In those cases where the Group sets up entities or has a holding in such entities, in order to allow its customers access to certain investments, to transfer risks or for other purposes, in accordance with internal criteria and procedures and with applicable regulations, the Group determines whether control over the entity in question actually exists and therefore whether it should be subject to consolidation.

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Such methods and procedures determine whether there is control by the Group, considering how the decisions are made about the relevant activities, assesses whether the Group has all power over the relevant elements, exposure, or rights, to variable returns from involvement with the investee and the ability to use power over the investee to affect the amount of the investor’s returns.

– Structured entities subject to consolidation

To determine if a structured entity is controlled by the Group, and therefore should be consolidated into the Group, the existing contractual rights (different from the voting rights) are analyzed. For this reason, an analysis of the structure and purpose of each investee is performed and, among others, the following factors will be considered:

- Evidence of the current ability to manage the relevant activities of the investee according to the specific business needs (including any decisions that may arise only in particular circumstances).

- Potential existence of a special relationship with the investee.

- Implicit or explicit Group commitments to support the investee.

- The ability to use the Group´s power over the investee to affect the amount of the Group’s returns.

There are cases where the Group has a high exposure to variable returns and retains decision-making power over the investee, either directly or through an agent.

The main structured entities of the Group are the so-called asset securitization funds, to which the BBVA Group transferred loans and receivables portfolios, and other vehicles, which allow the Group’s customers to gain access to certain investments or to allow for the transfer of risks and other purposes (See Appendix I and V). The BBVA Group maintains the decision-making power over the relevant activities of these vehicles and financial support through securitized market standard contractual. The most common ones are: investment positions in equity note tranches, funding through subordinated debt, credit enhancements through derivative instruments or liquidity lines, management rights of defaulted securitized assets, “clean-up” call derivatives, and asset repurchase clauses by the grantor.

For these reasons, the loans and receivable portfolios related to the vast majority of the securitizations carried out by the Bank or Group subsidiaries are not deregistered in the books of said entity and the issuances of the related debt securities are registered as liabilities within the Group’s consolidated balance sheet.

– Non-consolidated structured entities

The Group owns other vehicles also for the purpose of allowing access to customers to certain investment, transfer risks, and other purposes, but without the Group having control of the vehicles and are not consolidated in accordance with IFRS 10. The balance of assets and liabilities of these vehicles is not material in relation to the Group’s consolidated financial statements.

As of December 31, 2016, there was no material financial support from the Bank or subsidiaries to unconsolidated structured entities.

The Group does not consolidate any of the mutual funds it managed since the necessary control conditions are not met (see definition of control in the Glossary). Particularly, the BBVA Group does not act as arranger but as agent since it operates the mutual funds on behalf and for the benefit of investors or parties (arranger of arrangers) and, for this reason it does not control the mutual funds when exercising its authority for decision making.

On the other hand, the mutual funds managed by the Group are not considered structured entities (generally, retail funds without corporate identity over which investors have participations which gives them ownership of said managed equity). These funds are not dependent on a capital structure that could prevent them to carry out activities without additional financial support, being in any case insufficient as far as the activities themselves are concerned. Additionally, the risk of the investment is absorbed by the fund participants, and the Group is only exposed when it becomes a participant, and as such, there is no other risk for the Group.

In all cases, results of equity method investees acquired by the BBVA Group in a particular period are included taking into account only the period from the date of acquisition to the financial statements date. Similarly, the results of entities disposed of during any year are included taking into account only the period from the start of the year to the date of disposal.

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The financial statements of subsidiaries, associates and joint ventures used in the preparation of the consolidated financial statements of the Group relate to the same date of presentation than the consolidated financial statements. If financial statements at those same dates are not available, the most recent will be used, as long as these are not older than three months, and adjusting to take into account the most significant transactions. As of December 31, 2016, save for the case of the financial statements of 5 associates and joint-ventures deemed non-significant (four of which presented financial statements as of November 30, 2016 and one as of October 31, 2016), all of the financial statements of all Group entities were available.

Our banking subsidiaries, associates and joint venture around the world, are subject to supervision and regulation from a variety of regulatory bodies in relation to, among other aspects, the satisfaction of minimum capital requirements. The obligation to satisfy such capital requirements may affect the ability of such entities to transfer funds in the form of cash dividends, loans or advances. In addition, under the laws of the various jurisdictions where such entities are incorporated, dividends may only be paid out through funds legally available for such purpose. Even when the minimum capital requirements are met and funds are legally available, the relevant regulator or other public administrations could discourage or delay the transfer of funds to the Group in the form of cash, dividends, loans or advances for prudential reasons.

2.2 Accounting policies and valuation criteria applied

The accounting standards and policies and the valuation criteria applied in preparing these consolidated financial statements may differ from those used by some of the entities within the BBVA Group. For this reason, necessary adjustments and reclassifications have been made in the consolidation process to standardize these principles and criteria and comply with the IFRS-IASB.

The accounting standards and policies and valuation criteria used in preparing the accompanying consolidated financial statements are as follows:

2.2.1 Financial instruments

Measurement of financial instruments and recognition of changes in subsequent fair value

All financial instruments are initially accounted for at fair value which, unless there is evidence to the contrary, shall be the transaction price.

Excluding all trading derivatives not considered as economic hedges, all the changes in the fair value of the financial instruments arising from the accrual of interests and similar items are recognized under the headings “Interest income” or “Interest expenses”, as appropriate, in the accompanying consolidated income statement for the year in which the change occurred (see Note 37). The dividends received from other entities, other than associate entities and joint venture entities, are recognized under the heading “Dividend income” in the accompanying consolidated income statement for the year in which the right to receive them arises (see Note 38).

The changes in fair value after the initial recognition, for reasons other than those mentioned in the preceding paragraph, are treated as described below, according to the categories of financial assets and liabilities.

“Financial assets and liabilities held for trading” and “Financial assets and liabilities designated at fair value through profit or loss”

The assets and liabilities recognized under these headings of the consolidated balance sheets are measured upon acquisition at fair value and changes in the fair value (gains or losses) are recognized as their net value under the heading “Gains (losses) on financial assets and liabilities (net)” in the accompanying consolidated income statements (see Note 41). Except those interests derivatives designated as economic hedges on interest rate are registered in interest income or expense (Note 37), depending on where the result of the hedging instrument. However, changes in fair value resulting from variations in foreign exchange rates are recognized under the heading “Exchange differences (net)” in the accompanying consolidated income statements.

“Available-for-sale financial assets”

Assets recognized under this heading in the consolidated balance sheets are measured at their fair value. Subsequent changes in fair value (gains or losses) are recognized temporarily for their amount net of tax effect, under the heading “Accumulated other comprehensive income- Items that may be reclassified to profit or loss - Available-for-sale financial assets” in the consolidated balance sheets.

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Changes in the value of non-monetary items resulting from changes in foreign exchange rates are recognized temporarily under the heading “Accumulated other comprehensive income- Items that may be reclassified to profit or loss - Exchange differences” in the accompanying consolidated balance sheets. Changes in foreign exchange rates resulting from monetary items are recognized under the heading “Exchange differences (net)” in the accompanying consolidated income statements.

The amounts recognized under the headings “Accumulated other comprehensive income- Items that may be reclassified to profit or loss - Available-for-sale financial assets” and “Accumulated other comprehensive income- Items that may be reclassified to profit or loss - Exchange differences” continue to form part of the Group’s consolidated equity until the corresponding asset is derecognized from the consolidated balance sheet or until an impairment loss is recognized in the corresponding financial instrument. If these assets are sold, these amounts are derecognized and included under the headings “Gains (losses) on financial assets and liabilities (net)” or “Exchange differences (net)”, as appropriate, in the consolidated income statement for the year in which they are derecognized.

The net impairment losses in “Available-for-sale financial assets” over the year are recognized under the heading “Impairment losses on financial assets (net) – Other financial instruments not at fair value through profit or loss” (see Note 47) in the consolidated income statements for that period.

“Loans and receivables”, “Held-to-maturity investments” and “Financial liabilities at amortized cost”

Assets and liabilities recognized under these headings in the accompanying consolidated balance sheets are measured once acquired at “amortized cost” using the “effective interest rate” method. This is because the consolidated entities generally intend to hold such financial instruments to maturity.

Net impairment losses of assets recognized under these headings arising in each period are recognized under the heading “Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss – loans and receivables”, “Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss – held to maturity investments” or “Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss – financial assets measured at cost” (see Note 47) in the consolidated income statement for that period.

“Derivatives-Hedge Accounting” and “Fair value changes of the hedged items in portfolio hedges of interest-rate risk”

Assets and liabilities recognized under these headings in the accompanying consolidated balance sheets are measured at fair value.

Changes occurring subsequent to the designation of the hedging relationship in the measurement of financial instruments designated as hedged items as well as financial instruments designated as hedge accounting instruments are recognized as follows:

· In fair value hedges, the changes in the fair value of the derivative and the hedged item attributable to the hedged risk are recognized under the heading “Gains or losses from hedge accounting, net” in the consolidated income statement, with a corresponding item under the headings where hedging items (“Hedging derivatives”) and the hedged items are recognized, as applicable. Almost all of the hedges used by the Group are for interest-rate risks. Therefore, the valuation changes are recognized under the headings “Interest income” or “Interest expenses”, as appropriate, in the accompanying consolidated income statement (see Note 37).

· In fair value hedges of interest rate risk of a portfolio of financial instruments (portfolio-hedges), the gains or losses that arise in the measurement of the hedging instrument are recognized in the consolidated income statement, and the gains or losses that arise from the change in the fair value of the hedged item (attributable to the hedged risk) are also recognized in the consolidated income statement (in both cases under the heading “Gains or losses from hedge accounting, net”, using, as a balancing item, the headings “Fair value changes of the hedged items in portfolio hedges of interest rate risk” in the consolidated balance sheets, as applicable.

· In cash flow hedges, the gain or loss on the hedging instruments relating to the effective portion are recognized temporarily under the heading ““Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Hedging derivatives. Cash flow hedges” in the consolidated balance sheets, with a balancing entry under the heading “Hedging derivatives” of the Assets or Liabilities of the Consolidated Financial Statements as applicable. These differences are recognized in the accompanying consolidated income statement at the time when the gain or loss in the hedged instrument affects profit or loss, when the forecast transaction is executed or at the maturity date of the hedged item (See Note 37).

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· Differences in the measurement of the hedging items corresponding to the ineffective portions of cash flow hedges are recognized directly in the heading “Gains or (-) losses from hedge accounting, net” in the consolidated income statement (See Note 41).

· In the hedges of net investments in foreign operations, the differences attributable to the effective portions of hedging items are recognized temporarily under the heading “Accumulated other comprehensive income - Items that may be reclassified to profit or loss – Hedging of net investments in foreign transactions” in the consolidated balance sheets with a balancing entry under the heading “Hedging derivatives” of the Assets or Liabilities of the Consolidated Financial Statements as applicable. These differences in valuation are recognized under the heading “Exchange differences (net)” in the consolidated income statement when the investment in a foreign operation is disposed of or derecognized.

Other financial instruments

The following exceptions are applicable with respect to the above general criteria:

· Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying asset and are settled by delivery of those instruments are recorded in the consolidated balance sheet at acquisition cost; this may be adjusted, where appropriate, for any impairment loss (see Note 8).

· Accumulated other comprehensive income arising from financial instruments classified at the consolidated balance sheet date as “Non-current assets and disposal groups classified as held for sale” are recognized with the corresponding entry under the heading “Accumulated other comprehensive income- Items that may be reclassified to profit or loss – Non-current assets and disposal groups classified as held for sale” in the accompanying consolidated balance sheets.

Impairment losses on financial assets

Definition of impaired financial assets carried at amortized cost

A financial asset is considered impaired – and therefore its carrying amount is adjusted to reflect the effect of impairment – when there is objective evidence that events have occurred, which:

· In the case of debt instruments (loans and advances and debt securities), reduce the future cash flows that were estimated at the time the instruments were acquired. So they are considered impaired when there are reasonable doubts that the carrying amounts will be recovered in full and/or the related interest will be collected for the amounts and on the dates initially agreed.

· In the case of equity instruments, it means that their carrying amount may not be fully recovered.

As a general rule, the carrying amount of impaired financial assets is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes known. The recoveries of previously recognized impairment losses are reflected, if appropriate, in the consolidated income statement for the year in which the impairment is reversed or reduced, with an exception: any recovery of previously recognized impairment losses for an investment in an equity instrument classified as financial assets available for sale is not recognized in the consolidated income statement, but under the heading “ Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Available-for-sale financial assets” in the consolidated balance sheet (see Note 30).

In general, amounts collected on impaired loans and receivables are used to recognize the related accrued interest and any excess amount is used to reduce the unpaid principal.

When the recovery of any recognized amount is considered remote, such amount is written-off on the consolidated balance sheet, without prejudice to any actions that may be taken in order to collect the amount until the rights extinguish in full either because it is time-barred debt, the debt is forgiven, or other reasons.

Impairment on financial assets

The impairment on financial assets is determined by type of instrument and other circumstances that could affect it, taking into account the guarantees received by the owners of the financial instruments to assure (in part or in full) the performance of the financial assets. The BBVA Group recognizes impairment charges directly against the impaired financial asset when the likelihood of recovery is deemed remote, and uses an offsetting or allowance account when it recognizes non-performing loan provisions for the estimated losses.

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Impairment of debt securities measured at amortized cost

With regard to impairment losses arising from insolvency risk of the obligors (credit risk), a debt instrument, mainly Loans and receivables, is impaired due to insolvency when a deterioration in the ability to pay by the obligor is evidenced, either due to past due status or for other reasons.

The BBVA Group has developed policies, methods and procedures to estimate incurred losses on outstanding credit risk. These policies, methods and procedures are applied in the study, approval and execution of debt instruments and Commitments and guarantees given; as well as in identifying the impairment and, where appropriate, in calculating the amounts necessary to cover estimated losses.

The amount of impairment losses on debt instruments measured at amortized cost is calculated based on whether the impairment losses are determined individually or collectively. First it is determined whether there is objective evidence of impairment individually for individually significant debt instrument, and collectively for debt instrument that are not individually significant. In the case where the Group determines that no objective evidence of impairment in the case of debt instrument analyzed individually will be included in a group of debt instrument with similar risk characteristics and collectively impaired is analyzed.

In determining whether there is objective evidence of impairment the Group uses observable data on the following aspects:

· Significant financial difficulties of the obligors.

· Ongoing delays in the payment of interest or principal.

· Refinancing of credit due to financial difficulties by the counterparty.

· Bankruptcy or reorganization / liquidation are considered likely.

· Disappearance of the active market for a financial asset because of financial difficulties.

· Observable data indicating a reduction in future cash flows from the initial recognition such as adverse changes in the payment status of the counterparty (delays in payments, reaching credit cards limits, etc.)

· National or local economic conditions that are linked to “defaults” in the financial assets (unemployment rate, falling property prices, etc.).

Impairment losses on financial assets individually evaluated for impairment

The amount of the impairment losses incurred on financial assets represents the excess of their respective carrying amounts over the present values of their expected future cash flows. These cash flows are discounted using the original effective interest rate. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective rate determined under the contract.

As an exception to the rule described above, the market value of listed debt instruments is deemed to be a fair estimate of the present value of their expected future cash flows.

The following is to be taken into consideration when estimating the future cash flows of debt instruments:

· All the amounts that are expected to be recovered over the remaining life of the debt instrument; including, where appropriate, those which may result from the collateral and other credit enhancements provided for the debt instrument (after deducting the costs required for foreclosure and subsequent sale). Impairment losses include an estimate for the possibility of collecting accrued, past-due and uncollected interest.

· The various types of risk to which each debt instrument is subject.

· The circumstances in which collections will foreseeably be made.

Impairment losses on financial assets collectively evaluated for impairment

Impairment losses on financial assets collectively evaluated for impairment are calculated by using statistical procedures, and they are deemed equivalent to the portion of losses incurred on the date that the accompanying consolidated financial statements are prepared that has yet to be allocated to specific asset. The BBVA Group estimates impairment losses through statistical processes that apply historical data and other specific parameters that, although having been generated as of closing date for these consolidated financial statements, have arisen on an individual basis following the reporting date.

With respect to financial assets that have no objective evidence of impairment, the Group applies statistical methods using historical experience and other specific information to estimate the losses that the Group has

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incurred as a result of events that have occurred as of the date of preparation of the consolidated financial statements but have not been known and will be apparent, individually after the date of submission of the information. This calculation is an intermediate step until these losses are identified on an individual level, at which these financial instruments will be segregated from the portfolio of financial assets without objective evidence of impairment.

The incurred loss is calculated taking into account three key factors: exposure at default, probability of default and loss given default.

· Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty.

· Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The PD is associated with the rating/scoring of each counterparty/transaction.

· Loss given default (LGD) is the estimate of the loss arising in the event of default. It depends mainly on the characteristics of the counterparty, and the valuation of the guarantees or collateral associated with the asset.

In order to calculate the LGD at each balance sheet date, the Group evaluates the whole amount expected to be obtained over the remaining life of the financial asset. The recoverable amount from executable secured collateral is estimated based on the property valuation, discounting the necessary adjustments to adequately account for the potential fall in value until its execution and sale, as well as execution costs, maintenance costs and sale costs.

In addition, to identify the possible incurred but not reported losses (IBNR) in the unimpaired portfolio, an additional parameter called “LIP” (loss identification period) has to be introduced. The LIP parameter is the period between the time at which the event that generates a given loss occurs and the time when the loss is identified at an individual level. The analysis of the LIPs is carried out on the basis of uniform risk portfolios.

When the property right is contractually acquired at the end of the foreclosure process or when the assets of distressed borrowers are purchased, the asset is recognized in the financial statements (see Note 2.2.4).

Impairment of other debt instruments classified as financial assets available for sale

The impairment losses on other debt instruments included in the “Available-for-sale financial asset” portfolio are equal to the excess of their acquisition cost (net of any principal repayment), after deducting any impairment loss previously recognized in the consolidated income statement over their fair value.

When there is objective evidence that the negative differences arising on measurement of these debt instruments are due to impairment, they are no longer considered as “Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Available-for-sale financial assets” and are recognized in the consolidated income statement.

If all, or part of the impairment losses are subsequently recovered, the amount is recognized in the consolidated income statement for the year in which the recovery occurred, up to the amount previously recognized in the income statement.

Impairment of equity instruments

The amount of the impairment in the equity instruments is determined by the category where they are recognized:

· Equity instruments classified as available for sale: When there is objective evidence that the negative differences arising on measurement of these equity instruments are due to impairment, they are no longer registered as “Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Available-for-sale financial assets” and are recognized in the consolidated income statement. In general, the Group considers that there is objective evidence of impairment on equity instruments classified as available-for-sale when significant unrealized losses have existed over a sustained period of time due to a price reduction of at least 40% or over a period of more than 18 months.

When applying this evidence of impairment, the Group takes into account the volatility in the price of each individual equity instrument to determine whether it is a percentage that can be recovered through its sale on the market; other different thresholds may exist for certain equity instruments or specific sectors.

In addition, for individually significant investments, the Group compares the valuation of the most significant equity instruments against valuations performed by independent experts.

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Any recovery of previously recognized impairment losses for an investment in an equity instrument classified as available for sale is not recognized in the consolidated income statement, but under the heading “ Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Available-for-sale financial assets” in the consolidated balance sheet (see Note 30).

· Equity instruments measured at cost: The impairment losses on equity instruments measured at acquisition cost are equal to the excess of their carrying amount over the present value of expected future cash flows discounted at the market rate of return for similar equity instruments. In order to determine these impairment losses, save for better evidence, an assessment of the equity of the investee is carried out (excluding Accumulated other comprehensive income due to cash flow hedges) based on the last approved (consolidated) balance sheet, adjusted by the unrealized gains at measurement date.

Impairment losses are recognized in the consolidated income statement for the year in which they arise as a direct reduction of the cost of the instrument. These impairment losses may only be recovered subsequently in the event of the sale of these assets.

2.2.2 Transfers and derecognition of financial assets and liabilities

The accounting treatment of transfers of financial assets is determined by the form in which risks and benefits associated with the financial assets involved are transferred to third parties. Thus the financial assets are only derecognized from the consolidated balance sheet when the cash flows that they generate are extinguished, when their implicit risks and benefits have been substantially transferred to third parties or when the control of financial asset is transferred even with no physical transfer or substantial retention of such assets. In the latter case, the financial asset transferred is derecognized from the consolidated balance sheet, and any right or obligation retained or created as a result of the transfer is simultaneously recognized.

Similarly, financial liabilities are derecognized from the consolidated balance sheet only if their obligations are extinguished or acquired (with a view to subsequent cancellation or renewed placement).

The Group is considered to have transferred substantially all the risks and benefits if such risks and benefits account for the majority of the risks and benefits involved in ownership of the transferred financial assets. If substantially all the risks and benefits associated with the transferred financial asset are retained:

· The transferred financial asset is not derecognized from the consolidated balance sheet and continues to be measured using the same criteria as those used before the transfer.

· A financial liability is recognized at the amount equal to the amount received, which is subsequently measured at amortized cost or fair value with changes in the income statement, whichever the case.

· Both the income generated on the transferred (but not derecognized) financial asset and the expenses of the new financial liability continue to be recognized.

2.2.3 Financial guarantees

Financial guarantees are considered to be those contracts that require their issuer to make specific payments to reimburse the holder of the financial guarantee for a loss incurred when a specific borrower breaches its payment obligations on the terms – whether original or subsequently modified – of a debt instrument, irrespective of the legal form it may take. Financial guarantees may take the form of a deposit, bank guarantee, insurance contract or credit derivative, among others.

In their initial recognition, financial guarantees are recognized as liabilities in the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and interest receivable from these contracts over the term thereof, and the Group simultaneously recognize a corresponding asset in the consolidated balance sheet for the amount of the fees and commissions received at the inception of the transactions and the amounts receivable at the present value of the fees, commissions and interest outstanding.

Financial guarantees, irrespective of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required for them. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments measured at amortized cost (see Note 2.2.1).

The provisions recognized for financial guarantees considered impaired are recognized under the heading “Provisions - Provisions for contingent risks and commitments” on the liability side in the consolidated balance sheets (see Note 24). These provisions are recognized and reversed with a charge or credit, respectively; to “Provisions or reversal of provision” in the consolidated income statements (see Note 46).

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Income from financial guarantees is recorded under the heading “Fee and commission income” in the consolidated income statement and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee (see Note 40).

2.2.4 Non-current assets and disposal groups held for sale and liabilities included in disposal groups classified as held for sale

The heading “Non-current assets and disposal groups held for sale and liabilities included in disposal groups classified as held for sale” in the consolidated balance sheets includes the carrying amount of assets that are not part of the BBVA Group’s operating activities. The recovery of this carrying amount is expected to take place through the price obtained on its disposal (see Note 21).

This heading includes individual items and groups of items (“disposal groups”) and disposal groups that form part of a major operating segment and are being held for sale as part of a disposal plan (“discontinued operations”). The individual items include the assets received by the subsidiaries from their debtors, in full or partial settlement of the debtors’ payment obligations (assets foreclosed or donated in repayment of debt and recovery of lease finance transactions), unless the Group has decided to make continued use of these assets. The BBVA Group has units that specialize in real estate management and the sale of this type of asset.

Symmetrically, the heading “Liabilities included in disposal groups classified as held for sale” in the consolidated balance sheets reflects the balances payable arising from disposal groups and discontinued operations. Profit or loss from non-current assets and disposal groups classified as held for sale are generally measured, at the acquisition date and at any later date deemed necessary, at either their carrying amount or the fair value of the property (less costs to sell), whichever is lower.

In the case of real estate assets foreclosed or received in payment of debts, they are initially recognized at the lower of: the restated carrying amount of the financial asset and the fair value at the time of the foreclosure or receipt of the asset less estimated sales costs. The carrying amount of the financial asset is updated at the time of the foreclosure, treating the real property received as a secured collateral and taking into account the credit risk coverage that would correspond to it according to its classification prior to the delivery. For these purposes, the collateral will be valued at its current fair value (less sale costs) at the time of foreclosure. This carrying amount will be compared with the previous carrying amount and the difference will be recognized as a provision increase, if applicable. On the other hand, the fair value of the foreclosed asset is obtained by appraisal, evaluating the need to apply a discount on the asset derived from the specific conditions of the asset or the market situation for these assets, and in any case, deducting the company’s estimated sale costs.

At the time of the initial recognition, these real estate assets foreclosed or received in payment of debts, classified as “Non-current assets and disposal groups held for sale and liabilities included in disposal groups classified as held for sale” are valued at the lower of: their restated fair value less estimated sale costs and their carrying amount; a deterioration or impairment reversal can be recognized for the difference if applicable.

Non-current assets and disposal groups held for sale groups classified as held for sale are not depreciated while included under this heading.

Fair value of non-current assets and disposable instruments held for sale from foreclosures or recoveries is based, mainly, in appraisals or valuations made by independent experts on a yearly based or less should there be evidence of impairment. Gains and losses generated on the disposal of assets and liabilities classified as non-current held for sale, and liabilities included in disposal groups classified as held for sale as well as impairment losses and, where pertinent, the related recoveries, are recognized in “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” in the consolidated income statement (see Note 50). The remaining income and expense items associated with these assets and liabilities are classified within the relevant consolidated income statement headings.

Income and expenses for discontinued operations, whatever their nature, generated during the year, even if they have occurred before their classification as discontinued operations, are presented net of the tax effect as a single amount under the heading “Profit from discontinued operations” in the consolidated income statement, whether the business remains on the balance sheet or is derecognized from the balance sheet. As long as an asset remains in this category, it will not be amortized. This heading includes the earnings from their sale or other disposal.

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2.2.5 Tangible assets

Property, plant and equipment for own use

This heading includes the assets under ownership or acquired under lease finance, intended for future or current use by the BBVA Group and that it expects to hold for more than one year. It also includes tangible assets received by the consolidated entities in full or partial settlement of financial assets representing receivables from third parties and those assets expected to be held for continuing use.

Property, plant and equipment for own use are presented in the consolidated balance sheets at acquisition cost, less any accumulated depreciation and, where appropriate, any estimated impairment losses resulting from comparing this net carrying amount of each item with its corresponding recoverable amount.

Depreciation is calculated using the straight-line method, on the basis of the acquisition cost of the assets less their residual value; the land on which the buildings and other structures stand is considered to have an indefinite life and is therefore not depreciated.

The tangible asset depreciation charges are recognized in the accompanying consolidated income statements under the heading “Depreciation” (see Note 45) and are based on the application of the following depreciation rates (determined on the basis of the average years of estimated useful life of the various assets):

Type of Assets	Annual Percentage
Buildings for own use	1% - 4%
Furniture	8% - 10%
Fixtures	6% - 12%
Office supplies and hardware	8% - 25%

The BBVA Group’s criteria for determining the recoverable amount of these assets, in particular buildings for own use, is based on independent appraisals that are no more than 3-5 years old at most, unless there are indications of impairment.

At each reporting date, the Group entities analyze whether there are internal or external indicators that a tangible asset may be impaired. When there is evidence of impairment, the Group analyzes whether this impairment actually exists by comparing the asset’s net carrying amount with its recoverable amount (as the higher between its recoverable amount less disposal costs and its value in use). When the carrying amount exceeds the recoverable amount, the carrying amount is written down to the recoverable amount and depreciation charges going forward are adjusted to reflect the asset’s remaining useful life.

Similarly, if there is any indication that the value of a tangible asset has been recovered, the consolidated entities will estimate the recoverable amounts of the asset and recognize it in the consolidated income statement, recording the reversal of the impairment loss registered in previous years and thus adjusting future depreciation charges. Under no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.

Running and maintenance expenses relating to tangible assets held for own use are recognized as an expense in the year they are incurred and recognized in the consolidated income statements under the heading “Administration costs - Other administrative expenses - Property, fixtures and equipment” (see Note 44.2).

Other assets leased out under an operating lease

The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to recognize the impairment losses on them, are the same as those described in relation to tangible assets for own use.

Investment properties

The heading “Tangible assets - Investment properties” in the consolidated balance sheets reflects the net values (purchase cost minus the corresponding accumulated depreciation and, if appropriate, estimated impairment losses) of the land, buildings and other structures that are held either to earn rentals or for capital appreciation through sale and that are neither expected to be sold off in the ordinary course of business nor are destined for own use (see Note 17).

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The criteria used to recognize the acquisition cost of investment properties, calculate their depreciation and their respective estimated useful lives and recognize the impairment losses on them, are the same as those described in relation to tangible assets held for own use.

The BBVA Group’s criteria for determining the recoverable amount of these assets is based on independent appraisals that are no more than one year old at most, unless there are indications of impairment.

2.2.6 Inventories

The balance under the heading “Other assets - Inventories” in the consolidated balance sheets mainly includes the land and other properties that the BBVA Group’s real estate entities hold for development and sale as part of their real estate development activities (see Note 20).

The cost of inventories includes those costs incurred in during their acquisition and development, as well as other direct and indirect costs incurred in getting them to their current condition and location.

In the case of the cost of real-estate assets accounted for as inventories, the cost is comprised of: the acquisition cost of the land, the cost of urban planning and construction, non-recoverable taxes and costs corresponding to construction supervision, coordination and management. Borrowing cost incurred during the year form part of cost, provided that the inventories require more than a year to be in a condition to be sold.

Properties purchased from customers in distress, which the Group manages for sale, are measured at the acquisition date and any subsequent time, at either their related carrying amount or the fair value of the property (less costs to sell), whichever is lower. The carrying amount at acquisition date of these properties is defined as the balance pending collection on those assets that originated said purchases (net of provisions).

Impairment

The amount of any subsequent adjustment due to inventory valuation for reasons such as damage, obsolescence, reduction in sale price to its net realizable value, as well as losses for other reasons and, if appropriate, subsequent recoveries of value up to the limit of the initial cost value, are registered under the heading “ Impairment or (-) reversal of impairment on non-financial assets “ in the accompanying consolidated income statements (see Note 48) for the year in which they are incurred.

In the case of real-Estate assets above mentioned, if the fair value less costs to sell is lower than the carrying amount of the loan recognized in the consolidated balance sheet, a loss is recognized under the heading “Impairment or (-) reversal of impairment on non-financial assets” in the consolidated income statement for the period (see Note 48). In the case of real-estate assets accounted for as inventories, the BBVA Group’s criterion for determining their net realizable value is mainly based on independent appraisals no more than one year old, or less if there are indications of impairment.

Inventory sales

In sale transactions, the carrying amount of inventories is derecognized from the consolidated balance sheet and recognized as an expense under the income statement heading “Other operating expenses – Changes in inventories” in the year in which the income from its sale is recognized. This income is recognized under the heading “Other operating income – Financial income from non-financial services” in the consolidated income statements (see Note 42).

2.2.7 Business combinations

A business combination is a transaction, or any other deal, by which the Group obtains control of one or more businesses. It is accounted for by applying the acquisition method.

According to this method, the acquirer has to recognize the assets acquired and the liabilities and contingent liabilities assumed, including those that the acquired entity had not recognized in the accounts. The method involves the measurement of the consideration received for the business combination and its allocation to the assets, liabilities and contingent liabilities measured according to their fair value, at the purchase date, as well as the recognition of any non-controlling participation (minority interests) that may arise from the transaction.

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In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss under the heading “Gains (losses) on derecognized of non-financial assets and subsidiaries, net” of the Consolidated Income Statements. In prior reporting periods, the acquirer may have recognized changes in the value of its equity interest in the acquiree in other comprehensive income. If so, the amount that was recognized in other comprehensive income shall be recognized on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.

In addition, the acquirer shall recognize an asset in the consolidated balance sheet under the heading “Intangible asset - Goodwill” if on the acquisition date there is a positive difference between:

· the sum of the consideration transferred, the amount of all the non-controlling interests and the fair value of stock previously held in the acquired business; and

· the fair value of the assets acquired and liabilities assumed.

If this difference is negative, it shall be recognized directly in the income statement under the heading “Gain on Bargain Purchase in business combinations”.

Non-controlling interests in the acquired entity may be measured in two ways: either at their fair value; or at the proportional percentage of net assets identified in the acquired entity. The method of valuing non-controlling interest may be elected in each business combination. So far, the BBVA Group has always elected for the second method.

2.2.8 Intangible assets

Goodwill

Goodwill represents a portion of consideration transferred in advance by the acquiring entity for the future economic benefits from assets that cannot be individually identified and separately recognized. Goodwill is never amortized. It is subject periodically to an impairment analysis, and is written off if it is clear that there has been impairment.

Goodwill is assigned to one or more cash-generating units that expect to be the beneficiaries of the synergies derived from the business combinations. The cash-generating units represent the Group’s smallest identifiable asset groups that generate cash flows for the Group and that are largely independent of the flows generated from the Group’s other assets or groups of assets. Each unit or units to which goodwill is allocated:

· is the lowest level at which the entity manages goodwill internally;

· is not larger than an operating segment.

The cash-generating units to which goodwill has been allocated are tested for impairment (including the allocated goodwill in their carrying amount). This analysis is performed at least annually or more frequently if there is any indication of impairment.

For the purpose of determining the impairment of a cash-generating unit to which a part of goodwill has been allocated, the carrying amount of that cash-generating unit, adjusted by the theoretical amount of the goodwill attributable to the non-controlling interests, in the event they are not valued at fair value, is compared with its recoverable amount.

The recoverable amount of a cash-generating unit is equal to the fair value less sale costs and its value in use, whichever is greater. Value in use is calculated as the discounted value of the cash flow projections that the unit’s management estimates and is based on the latest budgets approved for the coming years. The main assumptions used in its calculation are: a sustainable growth rate to extrapolate the cash flows indefinitely, and the discount rate used to discount the cash flows, which is equal to the cost of the capital assigned to each cash-generating unit, and equivalent to the sum of the risk-free rate plus a risk premium inherent to the cash-generating unit being evaluated for impairment.

If the carrying amount of the cash-generating unit exceeds the related recoverable amount, the Group recognizes an impairment loss; the resulting loss is apportioned by reducing, first, the carrying amount of the goodwill allocated to that unit and, second, if there are still impairment losses remaining to be recognized, the carrying amount of the remainder of the assets. This is done by allocating the remaining loss in proportion to the carrying amount of each of the assets in the unit. In the event the non-controlling interests are measured at fair value, the deterioration of goodwill attributable to non-controlling interests will be recognized. In any case, an impairment loss recognized for goodwill shall not be reversed in a subsequent period.

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They are recognized under the heading “Impairment or (-) reversal of impairment on non-financial assets – Intangible assets” in the consolidated income statements (see Note 48).

Other intangible assets

These assets may have an indefinite useful life if, based on an analysis of all relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash flows for the consolidated entities. In all other cases they have a finite useful life.

Intangible assets with a finite useful life are amortized according to the duration of this useful life, using methods similar to those used to depreciate tangible assets. The defined useful time intangible asset is made up mainly of IT applications acquisition costs which have a useful life of 3 to 5 years. The depreciation charge of these assets is recognized in the accompanying consolidated income statements under the heading “Depreciation” (see Note 45).

The consolidated entities recognize any impairment loss on the carrying amount of these assets with charge to the heading “Impairment or (-) reversal of impairment on non - financial assets- Intangible assets” in the accompanying consolidated income statements (see Note 48). The criteria used to recognize the impairment losses on these assets and, where applicable, the recovery of impairment losses recognized in prior years, are similar to those used for tangible assets.

2.2.9 Insurance and reinsurance contracts

The assets of the BBVA Group’s insurance subsidiaries are recognized according to their nature under the corresponding headings of the consolidated balance sheets and the initial recognition and valuation is carried out according to the criteria set out in IFRS 4.

The heading “Reinsurance assets” in the accompanying consolidated balance sheets includes the amounts that the consolidated insurance subsidiaries are entitled to receive under the reinsurance contracts entered into by them with third parties and, more specifically, the share of the reinsurer in the technical provisions recognized by the consolidated insurance subsidiaries.

The heading “Liabilities under insurance contracts” in the accompanying consolidated balance sheets includes the technical provisions for direct insurance and inward reinsurance recognized by the consolidated insurance subsidiaries to cover claims arising from insurance contracts in force at period-end (see Note 23).

The income or expenses reported by the BBVA Group’s consolidated insurance subsidiaries on their insurance activities is recognized, in accordance with their nature, in the corresponding items of the consolidated income statements.

The consolidated insurance entities of the BBVA Group recognize the amounts of the premiums written to the income statement and a charge for the estimated cost of the claims that will be incurred at their final settlement to their consolidated income statements. At the close of each year the amounts collected and unpaid, as well as the costs incurred and unpaid, are accrued.

The most significant provisions registered by consolidated insurance entities with respect to insurance policies issued by them are set out by their nature in Note 23.

According to the type of product, the provisions may be as follows:

· Life insurance provisions:

Represents the value of the net obligations undertaken with the life insurance policyholder. These provisions include:

– Provisions for unearned premiums. These are intended for the accrual, at the date of calculation, of the premiums written. Their balance reflects the portion of the premiums received until the closing date that has to be allocated to the period from the closing date to the end of the insurance policy period.

– Mathematical reserves: Represents the value of the life insurance obligations of the insurance entities at year-end, net of the policyholder’s obligations, arising from life insurance contracted.

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· Non-life insurance provisions:

– Provisions for unearned premiums. These provisions are intended for the accrual, at the date of calculation, of the premiums written. Their balance reflects the portion of the premiums received until year-end that has to be allocated to the period between the year-end and the end of the policy period.

– Provisions for unexpired risks: The provision for unexpired risks supplements the provision for unearned premiums by the amount by which that provision is not sufficient to reflect the assessed risks and expenses to be covered by the consolidated insurance subsidiaries in the policy period not elapsed at year-end.

· Provision for claims:

This reflects the total amount of the outstanding obligations arising from claims incurred prior to year-end. Insurance subsidiaries calculate this provision as the difference between the total estimated or certain cost of the claims not yet reported, settled or paid, and the total amounts already paid in relation to these claims.

· Provision for bonuses and rebates:

This provision includes the amount of the bonuses accruing to policyholders, insurees or beneficiaries and the premiums to be returned to policyholders or insurees, as the case may be, based on the behavior of the risk insured, to the extent that such amounts have not been individually assigned to each of them.

· Technical provisions for reinsurance ceded:

Calculated by applying the criteria indicated above for direct insurance, taking account of the assignment conditions established in the reinsurance contracts in force.

· Other technical provisions:

Insurance entities have recognized provisions to cover the probable mismatches in the market reinvestment interest rates with respect to those used in the valuation of the technical provisions.

The BBVA Group controls and monitors the exposure of the insurance subsidiaries to financial risk and, to this end, uses internal methods and tools that enable it to measure credit risk and market risk and to establish the limits for these risks.

2.2.10 Tax assets and liabilities

Expenses on corporate income tax applicable to the BBVA Group’s Spanish entities and on similar income taxes applicable to consolidated foreign entities are recognized in the consolidated income statement, except when they result from transactions on which the profits or losses are recognized directly in equity, in which case the related tax effect is also recognized in equity. The total corporate income tax expense is calculated by aggregating the current tax arising from the application of the corresponding tax rate to the tax for the year (after deducting the tax credits or discounts allowable for tax purposes) and the change in deferred tax assets and liabilities recognized in the consolidated income statement.

Deferred tax assets and liabilities include temporary differences, defined as the amounts to be payable or recoverable in future years arising from the differences between the carrying amount of assets and liabilities and their tax bases (the “tax value”), and tax loss and tax credit or discount carry forwards (see Note 19).

The “Tax Assets” line item in the accompanying consolidated balance sheets includes the amount of all the assets of a tax nature, and distinguishes between: “Current” (amounts recoverable by tax in the next twelve months) and “Deferred” (which includes the amount of tax to be recovered in future years, including those arising from tax losses or credits for deductions or rebates that can be compensated). The “Tax Liabilities” line item in the accompanying consolidated balance sheets includes the amount of all the liabilities of a tax nature, except for provisions for taxes, broken down into: “Current” (income tax payable on taxable profit for the year and other taxes payable in the next twelve months) and “Deferred” (the amount of corporate tax payable in subsequent years).

Deferred tax liabilities attributable to taxable temporary differences associated with investments in subsidiaries, associates or joint venture entities are recognized as such, except where the Group can control the timing of the reversal of the temporary difference and it is unlikely that it will reverse in the future. Deferred tax assets are recognized to the extent that it is considered probable that the consolidated entities will have sufficient taxable profits in the future against which the deferred tax assets can be utilized and are not from the initial recognition (except in the case of a business combination) of other assets or liabilities in a transaction that does not affect the fiscal outcome or the accounting result.

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The deferred tax assets and liabilities recognized are reassessed by the consolidated entities at each balance sheet date in order to ascertain whether they are still current, and the appropriate adjustments are made on the basis of the findings of the analyses performed. In those circumstances in which it is unclear how a specific requirement of the tax law applies to a particular transaction or circumstance, and the acceptability of the definitive tax treatment depends on the decisions taken by the relevant taxation authority in future, the entity recognizes current and deferred tax liabilities and assets considering whether it is probable or not that a taxation authority will accept an uncertain tax treatment. Thus, if the entity concludes that it is not probable that the taxation authority will accept an uncertain tax treatment, the entity uses the amount expected to be paid to (recovered from) the taxation authorities.

The income and expenses directly recognized in equity that do not increase or decrease taxable income are accounted for as temporary differences.

2.2.11 Provisions, contingent assets and contingent liabilities

The heading “Provisions” in the consolidated balance sheets includes amounts recognized to cover the BBVA Group’s current obligations arising as a result of past events. These are certain in terms of nature but uncertain in terms of amount and/or settlement date. The settlement of these obligations is deemed likely to entail an outflow of resources embodying economic benefits (see Note 24). The obligations may arise in connection with legal or contractual provisions, valid expectations formed by Group entities relative to third parties in relation to the assumption of certain responsibilities or through virtually certain developments of particular aspects of the regulations applicable to the operation of the entities; and, specifically, future legislation to which the Group will certainly be subject. The provisions are recognized in the consolidated balance sheets when each and every one of the following requirements is met:

· They represent a current obligation that has arisen from a past event;

· At the date referred to by the consolidated financial statements, there is more probability that the obligation will have to be met than that it will not;

· It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

· The amount of the obligation can be reasonably estimated.

Among other items, these provisions include the commitments made to employees by some of the Group entities (mentioned in Note 2.2.12), as well as provisions for tax and legal litigation.

Contingent assets are possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement; however, they will be disclosed, should they exist, in the Notes to the consolidated financial statements, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits.

Contingent liabilities are possible obligations of the Group that arise from past events and whose existence is conditional on the occurrence or non-occurrence of one or more future events beyond the control of the Group. They also include the existing obligations of the Group when it is not probable that an outflow of resources embodying economic benefits will be required to settle them; or when, in extremely rare cases, their amount cannot be measured with sufficient reliability.

Contingent liabilities are not recognized in the consolidated balance sheet or the income statement (excluding contingent liabilities from business combination) but are reported in the consolidated financial statements.

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2.2.12 Pensions and other post-employment commitments

Below we provide a description of the most significant accounting criteria relating to post-employment and other employee benefit commitments assumed by BBVA Group entities (see Note 25).

Short-term employee benefits

Benefits for current active employees which are accrued and settled during the year and for which a provision is not required in the entity´s accounts. These include wages and salaries, social security charges and other personnel expenses.

Costs are charged and recognized under the heading “Administration costs – Personnel expenses – Other personnel expenses” of the consolidated income statement (see Note 44.1).

Post-employment benefits – Defined-contribution plans

The Group sponsors defined-contribution plans for the majority of its active employees. The amount of these benefits is established as a percentage of remuneration and/or as a fixed amount.

The contributions made to these plans in each period by BBVA Group entities are charged and recognized under the heading “Administration costs – Personnel expenses – Defined-contribution plan expense” of the consolidated income statement (see Note 44.1).

Post-employment benefits – Defined-benefit plans

Some Group entities maintain pension commitments with employees who have already retired or taken early retirement, certain closed groups of active employees still accruing defined benefit pensions, and in-service death and disability benefits provided to most active employees. These commitments are covered by insurance contracts, pension funds and internal provisions.

In addition, some of the Spanish entities have offered certain employees the option to retire before their normal retirement age, recognizing the necessary provisions to cover the costs of the associated benefit commitments, which include both the liability for the benefit payments due as well as the contributions payable to external pension funds during the early retirement period.

Furthermore, certain Group entities provide welfare and medical benefits which extend beyond the date of retirement of the employees entitled to the benefits.

All of these commitments are quantified based on actuarial valuations, with the amounts recorded under the heading “Provisions – Provisions for pensions and similar obligations” and determined as the difference between the value of the defined-benefit commitments and the fair value of plan assets at the date of the consolidated financial statements (see Note 25).

Current service cost are charged and recognized under the heading “Administration costs – Personnel expenses – Defined-benefit plan expense” of the consolidated income statement (see Note 44.1).

Interest credits/charges relating to these commitments are charged and recognized under the headings “Interest income” and “Interest expense” of the consolidated income statement.

Past service costs arising from benefit plan changes as well as early retirements granted during the period are recognized under the heading “Provisions or reversals of provisions” of the consolidated income statement (see Note 46).

Other long-term employee benefits

In addition to the above commitments, certain Group entities provide long service awards to their employees, consisting of monetary amounts or periods of vacation granted upon completion of a number of years of qualifying service.

These commitments are quantified based on actuarial valuations and the amounts recorded under the heading “Provisions – Other long-term employee benefits” of the consolidated balance sheet (see Note 24).

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Valuation of commitments: actuarial assumptions and recognition of gains/losses

The present value of these commitments is determined based on individual member data. Active employee costs are determined using the “projected unit credit” method, which treats each period of service as giving rise to an additional unit of benefit and values each unit separately.

In establishing the actuarial assumptions we taken into account that:

•             They should be unbiased, i.e. neither unduly optimistic nor excessively conservative.

•                  They should be mutually compatible and adequately reflect the existing relationship between economic variables such as price inflation, expected wage increases, discount rates and the expected return on plan assets, etc. Future wage and benefit levels should be based on market expectations, at the balance sheet date, for the period over which the obligations are to be settled.

•                  The interest rate used to discount benefit commitments is determined by reference to market yields, at the balance sheet date, on high quality bonds.

The BBVA Group recognizes actuarial gains/losses relating to early retirement benefits, long service awards and other similar items under the heading “Provisions or reversal of provisions” of the consolidated income statement for the period in which they arise (see Note 46). Actuarial gains/losses relating to pension and medical benefits are directly charged and recognized under the heading “Accumulated other comprehensive income – Items that will not be reclassified to profit or loss – Actuarial gains or (-) losses on defined benefit pension plans” of equity in the consolidated balance sheet (see Note 30).

2.2.13 Equity-settled share-based payment transactions

Provided they constitute the delivery of such equity instruments following the completion of a specific period of services, equity-settled share-based payment transactions are recognized as an expense for services being provided by employees, by way of a balancing entry under the heading “Shareholders’ equity – Other equity” in the consolidated balance sheet. These services are measured at fair value for the employees services received, unless such fair value cannot be calculated reliably. In such case, they are measured by reference to the fair value of the equity instruments granted, taking into account the date on which the commitments were granted and the terms and other conditions included in the commitments.

When the initial compensation agreement includes what may be considered market conditions among its terms, any changes in these conditions will not be reflected in the consolidated income statement, as these have already been accounted for in calculating the initial fair value of the equity instruments. Non-market vesting conditions are not taken into account when estimating the initial fair value of equity instruments, but they are taken into account when determining the number of equity instruments to be issued. This will be recognized on the consolidated income statement with the corresponding increase in total equity.

2.2.14 Termination benefits

Termination benefits are recognized in the accounts when the BBVA Group agrees to terminate employment contracts with its employees and has established a detailed plan.

2.2.15 Treasury stock

The value of common stock issued by the BBVA Group’s entities and held by them - basically, shares and derivatives on the Bank’s shares held by some consolidated entities that comply with the requirements to be recognized as equity instruments - are recognized as a decrease to net equity, under the heading “Shareholders’ funds - Treasury stock” in the consolidated balance sheets (see Note 29).

These financial assets are recognized at acquisition cost, and the gains or losses arising on their disposal are credited or debited, as appropriate, to the heading “Shareholders’ funds - Retained earnings” in the consolidated balance sheets (see Note 28).

2.2.16 Foreign-currency transactions and exchange differences

The BBVA Group’s functional currency, and thus the currency in which the consolidated financial statements are presented, is the euro. Thus, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in “foreign currency”.

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Conversion to euros of the balances held in foreign currency is performed in two consecutive stages:

· Conversion of the foreign currency to the functional currency (currency of the main economic environment in which the entity operates); and

· Conversion to euros of the balances held in the functional currencies of the entities whose functional currency is not the euro.

Conversion of the foreign currency to the functional currency

Transactions denominated in foreign currencies carried out by the consolidated entities (or accounted for using the equity method) are initially accounted for in their respective currencies. Subsequently, the monetary balances in foreign currencies are converted to their respective functional currencies using the exchange rate at the close of the financial year. In addition,

· Non-monetary items valued at their historical cost are converted to the functional currency at the exchange rate in force on the purchase date.

· Non-monetary items valued at their fair value are converted at the exchange rate in force on the date on which such fair value was determined.

· Income and expenses are converted at the period’s average exchange rates for all the operations carried out during the period. When applying this criterion the BBVA Group considers whether significant variations have taken place in exchange rates during the financial year which, owing to their impact on the statements as a whole, require the application of exchange rates as of the date of the transaction instead of such average exchange rates.

The exchange differences produced when converting the balances in foreign currency to the functional currency of the consolidated entities are generally recognized under the heading “Exchange differences (net)” in the consolidated income statements. However, the exchange differences in non-monetary items, measured at fair value, are recognized temporarily in equity under the heading “Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Exchange differences” in the consolidated balance sheets.

Conversion of functional currencies to euros

The balances in the financial statements of consolidated entities whose functional currency is not the euro are converted to euros as follows:

· Assets and liabilities: at the average spot exchange rates as of the date of each of the consolidated financial statements.

· Income and expenses and cash flows are converted by applying the exchange rate in force on the date of the transaction, and the average exchange rate for the financial year may be used, unless it has undergone significant variations.

· Equity items: at the historical exchange rates.

The exchange differences arising from the conversion to euros of balances in the functional currencies of the consolidated entities whose functional currency is not the euro are recognized under the heading “Accumulated other comprehensive income – Items that may be reclassified to profit or loss - Exchange differences” in the consolidated balance sheets. Meanwhile, the differences arising from the conversion to euros of the financial statements of entities accounted for by the equity method are recognized under the heading “ Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Entities accounted for using the equity method” until the item to which they relate is derecognized, at which time they are recognized in the income statement.

The breakdown of the main consolidated balances in foreign currencies, with reference to the most significant foreign currencies, is set forth in Appendix VII.

Venezuela

Local financial statements of the Group subsidiaries in Venezuela are expressed in Venezuelan Bolivar, and converted into euros for the consolidated financial statements, as indicated below, since Venezuela is a country with strong exchange restrictions and has different rates officially published:

· On February 10, 2015, the Venezuelan government announced the creation of a new foreign-currency system called SIMADI.

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· The Group used the SIMADI exchange rate from March 2015 for the conversion of the financial statements of the Group companies located in Venezuela for their consolidated financial statements. The SIMADI exchange rate started to reflect the exchange rate of actual transactions increasing rapidly to approximately 200 Venezuelan bolivars per U,S. dollar (approximately 218 Venezuelan bolivars per euro), however, from May, and during the second half of 2015 the trend was confirmed, the SIMADI exchange rate had hardly fluctuated, reaching as of December 31, 2015 216.3 Venezuelan bolivars per euro, which could be considered unrepresentative of the convertibility of the Venezuelan currency.

· In February 2016, the Venezuelan government approved a new exchange rate agreement which sets two new mechanisms that regulate the purchase and sale of foreign currency (DIRCOM) and the suspension of the SIMADI exchange rate.

· As of December 31, 2015 and 2016, the Board of Directors considers that the use of the new exchanges rates and, previously, SIMADI for converting bolivars into euros in preparing the consolidated financial statements does not reflect the true picture of the financial statements of the Group and the financial position of the Group subsidiaries in Venezuela.

· Consequently, as of December 31, 2015 and 2016, the Group has used in the conversion of the financial statements of these foreign exchange rates amounting to 469 and 1,893 Venezuelan bolivars per euro, respectively. These exchanges rates have been calculated taking into account the estimated evolution of inflation in Venezuela at those dates (170% and 300%, respectively) by the Research Service of the Group (see Note 2.2.20).

The summarized balance sheet and income statements of the Group subsidiaries in Venezuela, whose local financial statements are expressed in Venezuelan bolivars comparing their conversion to euros with the estimated exchange rate with the balances that would have result by applying the SIMADI exchange rate, are as follows:

	Million of Euros
Balance sheet December 2016	Estimated     exchange rate		DIRCOM		Variation
Cash and balances with central banks		363		971		608
Securities portfolio		93		248		155
Loans and recievables		513		1,371		858
Tangible assets		66		177		111
Other		36		95		59
TOTAL ASSETS		1,070		2,862		1,791
Deposits from central bank and credit institutions		2		5		3
Customer deposits		778		2,080		1,302
Provisions		21		57		35
Other		112		299		187
TOTAL LIABILITIES		913		2,441		1,528
	Million of Euros
Income statements December 2016	Estimated     exchange rate		DIRCOM		Variation
NET INTEREST ICOME		103		275		172
GROSS INCOME		52		139		87
Administration costs		55		146		91
NET OPERATING INCOME		(3)		(7)		(5)
OPERATING PROFIT BEFORE TAX		31		82		51
Tax expense or (-) income related to profit or loss from continuing operation		38		100		63
PROFIT		(7)		(19)		(12)
Attributable to minority interest [non-controlling interests]		(3)		(8)		(5)
Attributable to owners of the parent		(4)		(10)		(6)

2.2.17 Recognition of income and expenses

The most significant criteria used by the BBVA Group to recognize its income and expenses are as follows.

· Interest income and expenses and similar items:

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As a general rule, interest income and expenses and similar items are recognized on the basis of their period of accrual using the effective interest rate method. The financial fees and commissions that arise on the arrangement of loans and advances (basically origination and analysis fees) are deferred and recognized in the income statement over the expected life of the loan. The direct costs incurred in originating these loans and advances can be deducted from the amount of financial fees and commissions recognized. These fees are part of the effective interest rate for the loans and advances. Also dividends received from other entities are recognized as income when the consolidated entities’ right to receive them arises.

However, when a loan is deemed to be impaired individually or is included in the category of instruments that are impaired because their recovery is considered to be remote, the recognition of accrued interest in the consolidated income statement is discontinued. This interest is recognized for accounting purposes as income, as soon as it is received.

· Commissions, fees and similar items.

Income and expenses relating to commissions and similar fees are recognized in the consolidated income statement using criteria that vary according to the nature of such items. The most significant items in this connection are:

- Those relating to financial assets and liabilities measured at fair value through profit or loss, which are recognized when collected/paid.

- Those arising from transactions or services that are provided over a period of time, which are recognized over the life of these transactions or services.

- Those relating to single acts, which are recognized when this single act is carried out.

· Non-financial income and expenses:

These are recognized for accounting purposes on an accrual basis.

· Deferred collections and payments:

These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.

2.2.18 Sales and income from the provision of non-financial services

The heading “Other operating income” in the consolidated income statements includes the proceeds of the sales of assets and income from the services provided by the Group entities that are not financial institutions. In the case of the Group, these entities are mainly real estate and service entities (see Note 42).

2.2.19 Leases

Lease contracts are classified as finance leases from the inception of the transaction, if they substantially transfer all the risks and rewards incidental to ownership of the asset forming the subject-matter of the contract. Leases other than finance leases are classified as operating leases.

When the consolidated entities act as the lessor of an asset in finance leases, the aggregate present values of the lease payments receivable from the lessee plus the guaranteed residual value (normally the exercise price of the lessee’s purchase option on expiration of the lease agreement) are recognized as financing provided to third parties and, therefore, are included under the heading “Loans and receivables” in the accompanying consolidated balance sheets.

When the consolidated entities act as lessors of an asset in operating leases, the acquisition cost of the leased assets is recognized under “Tangible assets – Property, plant and equipment – Other assets leased out under an operating lease” in the consolidated balance sheets (see Note 17). These assets are depreciated in line with the criteria adopted for items of tangible assets for own use, while the income arising from the lease arrangements is recognized in the consolidated income statements on a straight-line basis within “Other operating expenses” (see Note 42).

If a fair value sale and leaseback results in an operating lease, the profit or loss generated from the sale is recognized in the consolidated income statement at the time of sale. If such a transaction gives rise to a finance lease, the corresponding gains or losses are accrued over the lease period.

The assets leased out under operating lease contracts to other entities in the Group are treated in the consolidated financial statements as for own use, and thus rental expense and income is eliminated and the corresponding depreciation is recognized.

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2.2.20 Entities and branches located in countries with hyperinflationary economies

In order to assess whether an economy is under hyperinflation, the country’s economic environment is evaluated, analyzing whether certain circumstances exist, such as:

· The country’s population prefers to keep its wealth or savings in non-monetary assets or in a relatively stable foreign currency;

· Prices may be quoted in a relatively stable foreign currency;

· Interest rates, wages and prices are linked to a price index;

· The cumulative inflation rate over three years is approaching, or exceeds, 100%.

The fact that any of these circumstances is present will not be a decisive factor in considering an economy hyperinflationary, but it does provide some reasons to consider it as such.

Since 2009, the economy of Venezuela can be considered hyperinflationary under the above criteria. As a result, the financial statements of the BBVA Group’s entities located in Venezuela have therefore been adjusted to correct for the effects of inflation in accordance with IAS 29 “ Financial Reporting in Hyperinflationary Economies”.

The breakdown of the General Price Index and the inflation index used as of December 31, 2016 and 2015 for the inflation restatement of the financial statements of the Group companies located in Venezuela is as follows:

General Price Index	2016 (*)		2015 (**)
GPI		9,431.60		2,357.90
Average GPI		5,847.74		1,460.50
Inflation of the period		300%		170%

(*) As of December 31, 2016, the Venezuelan government had not released the official inflation figures since December 2015, as in the Annual Report of 2015, the group estimated the inflation rate applicable at 300%.

(**) At the date of preparation of these consolidated financial statements in 2015, the Venezuelan government had not released the official inflation figures. The Group has estimated the inflation rate applicable to December 31, 2015, based on the best estimate of BBVA Research of the Group (170%) in line with other estimates made by various international organizations. Subsequently, at the publication of this Annual Report, the official inflation figures was published, ending at 180.9%

The losses recognized under the heading “Profit attributable to the parent company” in the accompanying consolidated income statement as a result of the adjustment for inflation on net monetary position of the Group entities in Venezuela amounted to €28 and 45 million in 2016 and 2015 respectively.

2.3 Recent IFRS pronouncements

Changes introduced in 2016

The following modifications to the IFRS standards or their interpretations (hereinafter “IFRIC”) came into force after January 1, 2016. They have not had a significant impact on the BBVA Group’s consolidated financial statements corresponding to the period ended December 31, 2016.

Amended IFRS 11 - “Joint Arrangements”

The amendments made to IFRS 11 require the acquirer of an interest in a joint operation in which the activity constitutes a business to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs. These modifications will be applied to the accounting years starting on or after January 1, 2016, although early adoption is permitted.

Amended IAS 16 - “Property, Plant and Equipment” and Amended IAS 38 – “Intangible Assets”.

The amendments made to IAS 16 and IAS 38 exclude, as general rule, as depreciation method to be used, those methods based on revenue that is generated by an activity that includes the use of an asset, because the revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits of the asset.

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Amended IAS 27 – “Separate financial statements”

Changes to IAS 27 allow entities to use the equity method to account for investment in subsidiaries, joint ventures and associates, in their separate financial statements.

Annual improvements cycle to IFRSs 2012-2014

The annual improvements cycle to IFRSs 2012-2014 includes minor changes and clarifications to IFRS 5 – Non current assets held for sale and discontinued operations, IFRS 7 – Financial instruments: Information to disclose, IAS 19 – Employee benefits and IAS 34 – interim financial information.

Amended IAS 1 – Presentation of Financial Statements

The amendments made to IAS 1 further encourage companies to apply professional judgment in determining what information to disclose in their financial statements, in determining when line items are disaggregated and additional headings and subtotals included in the statement of financial position and the statement of profit or loss and other comprehensive income, and in determining where and in what order information is presented in the financial disclosures.

Amended IFRS 10 - “Consolidated Financial Statements”, Amended IFRS 12 – “Disclosure of interests in other entities” and Amended IAS 28 – “Investments in Associates and Joint Ventures”

The amendments to IFRS 10, IFRS 12 and IAS 28 introduce clarifications to the requirements when accounting for investment entities in three aspects:

· The amendments confirm that a parent entity that is a subsidiary of an investment entity has the possibility to apply the exemption from preparing consolidated financial statements

· The amendments clarify that if an investment entity has a subsidiary whose main purpose is to support the investment entity’s investment activities by providing investment-related services or activities, to the entity or other parties, and that is not itself an investment entity, it shall consolidate that subsidiary; but if that subsidiary is itself an investment entity, the investment entity parent shall measure the subsidiary at fair value through profit or loss.

· The amendments require a non-investment entity investor to retain, when applying the equity method, the fair value measurement applied by an investment entity associate or joint venture to its interests in subsidiaries.

Standards and interpretations issued but not yet effective as of December 31, 2016

New International Financial Reporting Standards together with their interpretations had been published at the date of preparation of the accompanying consolidated financial statements, but are not obligatory as of December 31, 2016. Although in some cases the IASB permits early adoption before they come into force, the BBVA Group has not done so as of this date, as it is still analyzing the effects that will result from them.

IFRS 9 - “Financial instruments”

As of July, 24, 2014, IASB issued the IFRS 9 which will replace IAS 39 and includes a new classification and assessment requirements of financial assets and liabilities, impairment requirements of financial assets and hedge accounting policy.

· Classification and assessment of financial assets and liabilities

The classification of financial assets will depend on the company’s business model used for management purposes and the characteristics of the contractual cash flows, resulting in the measurement of such financial assets at amortized cost, fair value with changes in other comprehensive income and liabilities not measured at fair value through profit or loss, net.

The combined effect of applying the company’s business model and the characteristics of the contractual cash flows may result in differences in the stock of financial assets measured at amortized cost or at fair value compared to IAS 39, although the Group does not expect significant changes in this regard.

With regard to financial liabilities, the classification categories proposed by IFRS 9 are similar to those contained in IAS 39, so there should not be very significant differences save for the requirement to recognize changes in fair value related to own credit risk as a component of equity, in the case of financial liabilities designated at fair value through profit or loss.

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· Financial assets impairments

Impairment requirements will apply to financial assets measured at amortized cost and at fair value through other comprehensive income, and to lease receivables and certain loan commitments and financial guarantee contracts.

At initial recognition, an allowance is required for expected credit losses resulting from default events that may occur within the next 12 months (“12 month expected credit losses”).

In the event of a significant increase in credit risk, an allowance is required for expected credit losses resulting from all possible default events over the expected life of the financial instrument (“lifetime expected credit losses”).

The assessment of whether the credit risk has increased significantly since initial recognition should be performed for each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment of credit risk, and the estimation of expected credit losses, should be performed so that they are probability-weighted and unbiased and shall include all available information that is relevant to the assessment, including information about past events, current conditions and reasonable and supportable expectations of future events and economic conditions at the reporting date.

As a result, the goal is for the recognition and measurement of impairment to be more proactive and forward-looking than under the current incurred loss model of IAS 39.

Theoretically, an increase in the total level of impairment allowances is expected, since all financial assets will be assessed for at least 12 month expected credit losses and the population of financial assets to which lifetime expected credit losses will be applied is expected to be larger than the population for which there is objective evidence of impairment under IAS 39

· Hedge accounting

IFRS 9 will also affect hedge accounting, because the focus of the Standard is different from that of the current IAS 39, as it tries to align the accounting requirements with economic risk management. IFRS 9 will also permit to apply hedge accounting to a wider range of risks and hedging instruments. The Standard does not address the accounting for the macro hedging strategies. To avoid any conflict between the current macro hedge accounting and the new general hedge accounting requirements, IFRS 9 includes an accounting policy choice to continue applying hedge accounting according to IAS 39.

The IASB has established January 1, 2018, as the mandatory application date, with the possibility of early adoption.

During 2015 and 2016, the Group has been analyzing this new Standard and the implications it will have in 2018 on the classification of portfolios and the valuation models for financial instruments, focusing on impairment loss models for financial assets through expected loss models.

In 2017, the Group will continue working on the definition of accounting policies, on the implementation of the Standard, which has implications both on the financial statements and on the Group´s daily operations (initial and subsequent risk assessment, changes in systems, management metrics, etc.), and also on the models used for the presentation of financial statements.

As of the date of preparation of these Consolidated Financial Statements, the Group does not have an estimation of the quantitative impact that this Standard will have on January 1, 2018 when it will come into force. The Group expects to have a parallel calculation during 2017 in order to have comparative information for the previous year when the Standard comes into effect.

Amended IFRS 7 - “Financial instruments: Disclosures”

The IASB modified IFRS 7 in December 2011 to include new disclosures on financial instruments that entities will have to provide as soon as they apply IFRS 9 for the first time.

IFRS 15 - “Revenue from contracts with customers”

IFRS 15 contains the principles that an entity shall apply to account for revenue and cash flows arising from a contract with a customer.

The core principle of IFRS 15 is that a company should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to

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be entitled in exchange for those goods or services, in accordance with contractually agreed. It is considered that the good or service is transferred when the customer obtains control over it.

The new Standard replaces IAS 18 - Revenue IAS 11 - Construction Contracts, IFRIC 13 - Customer Loyalty Programmes, IFRIC 15 - Agreements for the Construction of Real Estate, IFRIC 18 - Transfers of Assets from Customers and SIC 31 – Revenue-Transactions Involving Advertising Services

This Standard will be applied to the accounting years starting on or after January 1, 2018, although early adoption is permitted.

IFRS 15 – “Clarifications to IFRS 15 Revenue from Contracts with Customers”

The amendments to the Revenue Standard clarify how some of the underlying principles of the new Standard should be applied. Specifically, they clarify how to:

● Identify a performance obligation (the promise to transfer a good or a service to a customer) in a contract;

● Determine whether a company is a principal (the provider of a good or service) or an agent (responsible for arranging for the good or service to be provided); and

● Determine whether the revenue from granting a license should be recognized at a point in time or over time.

In addition to the clarifications, the amendments include two additional reliefs to reduce cost and complexity for a company when it first applies the new Standard.

The amendments will be applied at the same time as the IFRS 15, i.e. to the accounting periods beginning on or after January 1, 2018, although early application is permitted.

Amended IFRS 10 – “Consolidated financial statements” and Amended IAS 28 - “Investments in Associates and Joint Ventures”

The amendments to IFRS 10 and IAS 28 establish that when an entity sells or transfers assets are considered a business (including its consolidated subsidiaries) to an associate or joint venture of the entity, the latter will have to recognize any gains or losses derived from such transaction in its entirety. Notwithstanding, if the assets sold or transferred are not considered a business, the entity will have to recognize the gains or losses derived only to the extent of the interests in the associate or joint venture with unrelated investors.

These changes will be applicable to accounting periods beginning on the effective date, still to be determined, although early adoption is allowed.

IAS 12 – “Income Taxes. Recognition of Deferred Tax Assets for Unrealized Losses”

The amendments made to IAS 12 clarify the requirements on recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value. The following aspects are clarified:

● An unrealized loss on a debt instrument measured at fair value gives rise to a deductible temporary difference regardless of whether the holder expects to recover its carrying amount by holding the debt instrument until maturity or by selling the debt instrument.

● An entity assesses the utilization of deductible temporary differences in combination with other deductible temporary differences. In circumstances in which tax laws restricts the utilization of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the appropriate type.

● An entity’s estimate of future taxable profit can include amounts from recovering assets for more than their carrying amounts if there is sufficient evidence to conclude that it is probable that the entity will achieve this.

● An entity’s estimate of future taxable profit excludes tax deductions resulting from the reversal of deductible temporary difference.

These modifications will be applied to the accounting periods beginning on or after January 1, 2017, although early application is permitted.

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IFRS 16 – “Leases”

On January 13, 2016 the IASB issued the IFRS 16 which will replace IAS 17. The new standard introduces a single lessee accounting model and will require a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee will be required to recognize a right-of–use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.

With regard to lessor accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor will continue to classify its leases as operating leases or finance leases, and account for those two types of leases differently.

The standard will be applied to the accounting years starting on or after January 1, 2019, although early application is permitted if IFRS 15 is also applied.

IAS 7 – “Statement of Cash Flows. Disclosure Initiative”

The amendments to IAS 7 introduce the following new disclosure requirements related to changes in liabilities arising from financing activities, to the extent necessary to enable users of financial statements to evaluate changes in those liabilities: changes from financing cash flows; changes arising from obtaining or losing control of subsidiaries or other businesses; the effect of changes in foreign exchange rates; changes in fair values; and other changes.

Liabilities arising from financing activities are liabilities for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows arising from financing activities. Additionally, the disclosure requirements also apply to changes in financial assets if cash flows from those financial assets were, or future cash flows will be, included in cash flows from financing activities.

These modifications will be applied to the accounting periods beginning on or after January 1, 2017, although early application is permitted.

IFRS 2 – “Classification and Measurement of Share-based Payment Transactions”

The amendments made to IFRS 2 provide requirements on three different aspects:

● When measuring the fair value of a cash-settled share-based payment vesting conditions, other than market conditions, shall be taken into account by adjusting the number of awards included in the measurement of the liability arising from the transaction.

● A transaction in which an entity settles a share-base payment arrangement net by withholding a specified portion of the equity instruments to meet a statutory tax withholding obligation will be classified as equity settled in its entirety if, without the net settlement feature, the entire share-based payment would otherwise be classified as equity-settled.

● In case of modification of a share-based payment from cash-settled to equity-settled, the modification will be accounted for derecognizing the original liability and recognizing in equity the fair value of the equity instruments granted to the extent that services have been rendered up to the modification date; any difference will be recognized immediately in profit or loss.

These modifications will be applied to the accounting periods beginning on or after January 1, 2018, although early application is permitted.

Amended IFRS 4 “Insurance Contracts”

The amendments made to IFRS 4 address the temporary accounting consequences of the different effective dates of IFRS 9 and the forthcoming insurance contracts Standard, by introducing two optional solutions:

● The deferral approach or temporary exemption, that gives entities whose predominant activities are connected with insurance the option to defer the application of IFRS 9 and continue applying IAS 39 until 2021.

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● The overlay approach, that gives all issuers of insurance contracts the option to recognize in other comprehensive income, rather than profit or loss, the additional accounting volatility that may arise from applying IFRS 9 compared to applying IAS 39 before applying the forthcoming insurance contracts Standard.

These modifications will be applied to the accounting periods beginning on or after January 1, 2018, although early application is permitted.

Annual improvements cycle to IFRSs 2014-2016

The annual improvements cycle to IFRSs 2014-2016 includes minor changes and clarifications to IFRS 1- Frist-time Adoption of International Financial Reporting Standards, IFRS 12 – Disclosure of Interests in Other Entities and IAS 28 – Investments in Associates and Joint Ventures.

Amendments to IFRS 1 and IAS 28 will be applied to the accounting periods beginning on or after January 1, 2018, although early application is permitted to amendments to IAS 28. Amendments to IFRS 12 will be applied to the accounting periods beginning on or after January 1, 2017.

IFRIC 22- Foreign Currency Transactions and Advance Consideration

The Interpretation addresses how to determine the date of the transaction, and thus, the exchange rate to use to translate the related asset, expense or income on initial recognition, in circumstances in which a non-monetary prepayment asset or a non-monetary deferred income liability arising from the payment or receipt of advance consideration is recognized in advance of the related asset, income or expense. It requires that the date of the transaction will be the date on which an entity initially recognizes the non-monetary asset or non-monetary liability.

If there are multiple payments or receipts in advance, the entity shall determine a date of the transaction for each payment or receipt of advance consideration.

The interpretation will be applied to the accounting periods beginning on or after January 1, 2018, although early application is permitted.

Amended IAS 40 – Investment Property

The amendment states that an entity shall transfer a property to, or from, investment property when, and only when, there is evidence of a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property.

The amendments will be applied to the accounting periods beginning on or after January 1, 2018, although early adoption is allowed.

3. BBVA Group

The BBVA Group is an international diversified financial group with a significant presence in retail banking, wholesale banking, asset management and private banking. The Group also operates in other sectors such as insurance, real estate, operational leasing, etc.

Appendices I and II provide relevant information as of December 31, 2016 on the Group’s subsidiaries, consolidated structured entities, and investments in associate entities and joint venture entities. Appendix III shows the main changes in investments for the year ended December 31, 2015, and Appendix IV gives details of the consolidated subsidiaries and which, based on the information available, are more than 10% owned by non-Group shareholders as of December 31, 2016.

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The following table sets forth information related to the Group’s total assets as of December 31, 2016, 2015 and 2014, broken down by the Group’s entities according to their activity:

			Millions of Euros
Contribution to Consolidated Group Total Assets. Entities by Main Activities	2016		2015		2014
Banks and other financial services		699,592		717,981		601,794
Insurance and pension fund managing companies		26,831		25,741		23,370
Other non-financial services		5,433		6,133		6,778
Total		731,856		749,855		631,942

The total assets and results of operations broken down by the geographical areas, in which the BBVA Group operates, are included in Note 6.

The BBVA Group’s activities are mainly located in Spain, Mexico, South America, the United States and Turkey, with active presence in other countries, as shown below:

· Spain

The Group’s activity in Spain is mainly through Banco Bilbao Vizcaya Argentaria, S.A., which is the parent company of the BBVA Group. The Group also has other entities that operate in Spain’s banking sector, insurance sector, real estate sector, services and as operational leasing entities.

· Mexico

The BBVA Group operates in Mexico, not only in the banking sector, but also in the insurance sector through Grupo Financiero Bancomer.

· South America

The BBVA Group’s activities in South America are mainly focused on the banking and insurance sectors, in the following countries: Argentina, Chile, Colombia, Peru, Paraguay, Uruguay and Venezuela. It has a representative office in Sao Paulo (Brazil).

The Group owns more than 50% of most of the entities based in these countries. Appendix I shows a list of the entities which, although less than 50% owned by the BBVA Group as of December 31, 2016, are consolidated (see Note 2.1).

· The United States

The Group’s activity in the United States is mainly carried out through a group of entities with BBVA Compass Bancshares, Inc. at their head, the New York BBVA branch and a representative office in Silicon Valley (California).

· Turkey

The Group’s activity in Turkey is mainly carried out through the Garanti Group.

· Rest of Europe

The Group’s activity in Europe is carried out through banks and financial institutions in Ireland, Switzerland, Italy, Netherlands, Romania and Portugal, branches in Germany, Belgium, France, Italy and the United Kingdom, and a representative office in Moscow.

· Asia-Pacific

The Group’s activity in this region is carried out through branches (in Taipei, Seoul, Tokyo, Hong Kong Singapore and Shanghai) and representative offices (in Beijing, Mumbai, Abu Dhabi, Sydney and Jakarta).

Changes in the Group in 2016

Mergers

The BBVA Group, at its Board of Directors meeting held on March 31, 2016, adopted a resolution to begin a merger process of BBVA S.A. (absorbing company), Catalunya Banc, S.A., Banco Depositario BBVA, S.A. y Unoe Bank, S.A.

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This transaction is part of the corporate reorganization of its banking subsidiaries in Spain and has been successfully completed throughout 2016 and has no impact in the consolidated financial statements both from the accounting and the solvency stand points.

Changes in the Group in 2015

During 2015, it was registered the full consolidation of Garanti since the date of effective control (third quarter) and the acquisition of Catalunya Banc (second quarter). These effects impact on the period-on-period comparison of all the income statements.

Investments

Acquisition of an additional 14.89% of Garanti

On November 19, 2014, the Group signed a new agreement with Dogus Holding AS, Ferit Faik Sahenk, Dianne Sahenk and Defne Sahenk (hereinafter “Dogus”) to, among other terms, the acquisition of 62,538,000,000 additional shares of Garanti (equivalent to 14.89% of the capital of this entity) for a maximum total consideration of 8.90 Turkish lira per batch (Garanti traded in batches of 100 shares each).

In the same agreement stated that if the payment of dividends for the year 2014 was executed by Dogus before the closing of the acquisition, that amount would be deducted from the amount payable by BBVA. On April 27, 2015, Dogus received the amount of the dividend paid to shareholders of Garanti, which amounted to Turkish Liras 0.135 per batch.

On July 27, 2015, after obtaining all the required regulatory approvals, the Group has materialized said participation increase after the acquisition of the new shares. Now the Group’s interest in Garanti is 39.9%.

The total price effectively paid by BBVA amounts to 8,765 TL per batch (amounting to approximately TL 5,481 million and €1,857 million applying a 2.9571 TL/EUR exchange rate).

In accordance with the IFRS-IASB accounting rules, and as a consequence of the agreements reached, the BBVA Group shall, at the date of effective control, measure at fair value its previously acquired stake of 25.01% in Garanti (classified as a joint venture accounted for using the equity method) and shall consolidate Garanti in the consolidated financial statements of the BBVA Group, beginning on the above-mentioned effective control date.

Measuring the above-mentioned stake in Garanti Bank at fair value resulted in a negative impact in “Gains or (-) losses on derecognition of non-financial assets and subsidiaries, net” in the consolidated income statement of the BBVA Group for the year 2015, which resulted in a net negative impact in the Profit attributable to owners of the parent of the BBVA Group in 2015 amounting to €1,840 million. Such accounting impact does not translate into any additional cash outflow from BBVA. Most of this impact is generated by the exchange rate differences due to the depreciation of the TL against Euro since the initial acquisition by BBVA of the 25.01% stake in Garanti Bank up to the date of effective control. As of December 31, 2015, these exchange rate differences were already registered as Other Comprehensive Income deducting the stock shareholder’s equity of the BBVA Group.

The agreements with the Dogus group include an agreement for the management of the bank and the appointment by the BBVA Group of the majority of the members of its Board of Directors (7 of 10). The 39.9% stake in Garanti is consolidated in the BBVA Group, because of these management agreements.

The Group estimate according to the acquisition method, the comparison between the fair values assigned to the assets acquired and the liabilities assumed from Garanti, along with the identified intangible assets, and cash payment made by the BBVA Group in consideration of the transaction generated a goodwill of €624 million (at exchange rate of December 31,2016), which is registered under the heading “Intangible assets - Goodwill” in the accompanying consolidated balance sheets as of December 31, 2016 (see Note 18.1).

Acquisition of Catalunya Banc

On July 21, 2014, the Management Commission of the Banking Restructuring Fund (known as “FROB”) accepted BBVA´s bid in the competitive auction for the acquisition of Catalunya Banc, S.A. (“Catalunya Banc”).

On April 24, 2015, once the necessary authorizations have been obtained and all the agreed conditions precedent have been fulfilled, BBVA announced that it acquired 1,947,166,809 shares of Catalunya Banc, S.A. (approximately 98.4% of its share capital) for a price of approximately €1,165 million.

According to the purchase method, the comparison between the fair values assigned to the assets acquired and the liabilities assumed from Catalunya Banc, and the cash payment made to the FROB in consideration of the transaction generated a difference of €26 million, which is registered under the heading “Negative goodwill

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recognized in profit or loss” in the accompanying consolidated income statement as of December 31, 2015. According to the IFRS 3, there is a period, up to a year, to complete the necessary adjustments to the calculation of initial acquisition (see Note 18.1). After the deadline, there has not been any significant adjustment that involves amending the calculation recorded in the year 2015.

Divestitures

Partial sale of China CITIC Bank Corporation Limited (CNCB)

On January 23, 2015 the Group BBVA signed an agreement to sell 4.9% in China CITIC Bank Corporation Limited (CNCB) to UBS AG, London Branch (UBS), who entered into transactions pursuant to which such CNCB shares will be transferred to a third party and the ultimate economic benefit of ownership of such CNCB shares will be transferred to Xinhu Zhongbao Co., Ltd (Xinhu) (the Relevant Transactions). On March 12, 2015, after having obtained the necessary approvals, BBVA completed the sale.

The selling price to UBS is HK$ 5.73 per share, amounting to a total of HK$ 13,136 million, equivalent to approximately €1,555 million (with an exchange rate of EUR/HK$=8.45 as of the date of the closing).

In addition to the above mentioned 4.9%, during the first semester of 2015 various sales were made in the market to total a 6.34% participation sale. The impact of these sales on the consolidated financial statements of the BBVA Group was a gain net of taxes of approximately €705 million. This gain gross of taxes was recognized under “Profit or loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations”.

Sale of the participation in Citic International Financial Holding (CIFH)

On December 23, 2014, the BBVA Group signed an agreement to sell its participation of 29.68% in Citic International Financial Holdings Limited (hereinafter “CIFH”), to China CITIC Bank Corporation Limited (hereinafter “CNCB”). CIFH is a non-listed subsidiary of CNCB domiciled in Hong Kong. The selling price is HK$8,162 million. The closing of such agreement is subject to the relevant regulatory approvals. The estimated impact on the attributable profit of the consolidated financial statements of the BBVA Group will not be significant.

On August 27, BBVA completed the sale of this participation. The impact on the consolidated financial statements of the BBVA Group was not significant.

Changes in the Group in 2014

In 2014 there were no significant changes.

4. Shareholder remuneration system

Shareholder remuneration scheme

During 2012, 2013, 2014, 2015 and 2016 a shareholder remuneration system called the “Dividend Option” was implemented.

Under this remuneration scheme, BBVA offers its shareholders the possibility to receive all or part of their remuneration in the form of BBVA newly-issued ordinary shares; whilst maintaining the possibility for BBVA shareholders to receive their entire remuneration in cash by selling their free allocation rights to BBVA (in execution of the commitment assumed by BBVA to acquire the free allocation rights attributed to the shareholders at a guaranteed fixed price) or by selling their free allocation rights on the market at the prevailing market price at that time.

On September 28, 2016, the Board of Directors approved the execution of the second of the share capital increases charged to voluntary reserves, as agreed by the AGM held on March 11, 2016 to implement the Dividend Option. As a result of this increase, the Bank’s share capital increased by €42,266,085.33 by the issuance of 86,257,317 BBVA newly-issued shares at a €0.49 par value each. 87.85% of the right owners have opted to receive newly-issued BBVA ordinary shares. The other 12.15% of the right owners opted to sell the rights of free allocation assigned to them to BBVA, and as a result, BBVA acquired 787,374,942 rights for a total amount of €62,989,995.36. The price at which BBVA has acquired such rights of free allocation (in execution of said commitment) was €0.08 per right, registered in “Total Equity-Dividends and Remuneration” of the consolidated balance sheet as of December, 31, 2016.

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On March 31, 2016, the Board of Directors approved the execution of the first of the share capital increases charged to voluntary reserves, as agreed by the AGM held on March 11, 2016 to implement the Dividend Option. As a result of this increase, the Bank’s share capital increased by €55,702,125.43 by the issuance of 113,677,807 BBVA newly-issued shares at a €0.49 par value each. 82.13% of the right owners have opted to receive newly-issued BBVA ordinary shares. The other 17.87% of the right owners opted to sell the rights of free allocation assigned to them to BBVA, and as a result, BBVA acquired 1,137,500,965 rights for a total amount of €146,737,624.49. The price at which BBVA has acquired such rights of free allocation (in execution of said commitment) was €0.129 per right, registered in “Total Equity-Dividends and Remuneration” of the consolidated balance sheet as of December 31, 2016.

On September 30, 2015, the Board of Directors approved the execution of the second of the share capital increases charged to voluntary reserves, as agreed by the AGM held on March 13, 2015 to implement the Dividend Option. As a result of this increase, the Bank’s share capital increased by €30,106,631.94 by the issuance of 61,442,106 BBVA newly-issued shares at a €0.49 par value each. 89.65% of the right owners opted to receive newly issued ordinary shares. The other 10.35% of the right owners opted to sell the rights of free allocation assigned to them to BBVA, and as a result, BBVA acquired 652,564,118 rights for a total amount of €52,205,129.44. The price at which BBVA acquired such rights of free allocation was €0.08 per right, registered in “Total Equity- Interim dividends” of the consolidated balance sheet as of December 31, 2015.

On March 25, 2015, the Board of Directors approved the execution of the first of the share capital increases charged to voluntary reserves, as agreed by the AGM held on March 13, 2015 to implement the Dividend Option. As a result of this increase, the Bank’s share capital increased by €39,353,896.26 (80,314,074 shares at a €0.49 par value each). 90.31% of the right owners opted to receive newly-issued BBVA ordinary shares. The other 9.69% of the right owners opted to sell the rights of free allocation assigned to them to BBVA, and as a result, BBVA acquired 602,938,646 rights for a total amount of €78,382,023.98. The price at which BBVA acquired such rights of free allocation was €0.13 per right, registered in “Total Equity- Interim dividends” of the consolidated balance sheet as of December 31, 2015.

Dividends

The Board of Directors, at its meeting held on June 22, 2016, approved the payment in cash of €0.08 (€0.0648 withholding tax) per BBVA share, as gross interim dividend against 2016 results. The dividend has been set to be paid on July 11, 2017

The Board of Directors, at its meeting held on December 21, 2016, approved the payment in cash of €0.08 (€0.0648 withholding tax) per BBVA share, as gross interim dividend against 2016 results. The dividend has been set to be paid on January 12, 2017 (see Note 22.4).

The interim accounting statements prepared in accordance with legal requirements evidencing the existence of sufficient liquidity for the distribution of the interim dividend in the amount approved, are as follows:

	Millions of Euros
Available Amount for Interim Dividend Payments	May 31,   2016		November 30, 2016
Profit of BBVA, S.A. at each of the dates indicated, after the provision for income tax		1,371		1,826
Less -
Estimated provision for Legal Reserve		11		20
Acquisition by the bank of the free allotment rights in 2016 capital increase		147		210
Additional Tier I capital instruments remuneration		114		260
Interim dividends for 2016 already paid		-		518
Maximum amount distributable		1,099		818
Amount of proposed interim dividend		518		525
BBVA cash balance available to the date		2,614		3,003

The first amount of the 2016 interim dividend which was paid to the shareholders on July 11, 2016, after deducting the treasury shares held by the Group’s entities, amounted to €517 million, and is recognized under the heading “Stockholders’ funds – Interim dividends” of the interim balance sheet as of December 31, 2016

The total amount of the second dividend of 2016, which was paid to the shareholders on January 12, 2017, after deducting the treasury shares held by the Group’s companies, amounted to €525 million and was

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recognized under the heading “Stockholders’ funds – Interim dividends” charged in the “Financial liabilities at amortized cost – Other financial liabilities (see Note 22.4) of the consolidated balance sheet as of December 31, 2016.

As of February 1, 2017 and in accordance with BBVA’s remuneration policy, it is expected to be proposed for the consideration of the competent governing bodies of approval of a capital increase to be charged to reserves for the instrumentation of a “Dividend Option” in 2017 in a gross of 0.13 euro per share approximately. The subsequent shareholders’ remunerations that could be approved would be fully in cash.

The allocation of earnings for 2016 subject to the approval of the Board of Directors at the Annual Shareholders Meeting is presented below:

	Millions of Euros
Allocation of Earnings	2016
Profit for year (*)		1,662
Distribution:
Interim dividends		1,043
Acquisition by the bank of the free allotment rights(**)		210
Additional Tier 1 securities		260
Legal reserve		19
Voluntary reserves		130

(*) Net Income of BBVA, S.A.

(**) Concerning to the remuneration to shareholders who choose to be paid in cash through the “Dividend Option”.

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5. Earnings per share

Basic and diluted earnings per share are calculated in accordance with the criteria established by IAS 33. For more information see Glossary of terms.

The Bank issued additional share capital in 2016, 2015 and 2014 (see “Dividend Option” Program in 2015 in Note 26). In accordance with IAS 33, when events, other than the conversion of potential shares, have changed the number of shares outstanding without a corresponding change in resources, the weighted average number of shares outstanding during the period and for all the periods presented shall be adjusted. The prior year weighted average number of shares is adjusted by applying a corrective factor.

The calculation of earnings per share is as follows:

Basic and Diluted Earnings per Share	2016		2015 (*)		2014 (*)
Numerator for basic and diluted earnings per share (millions of euros)
Profit attributable to parent company		3,475		2,642		2,618
Adjustment: Additional Tier 1 securities (1)		(260)		(212)		(126)
Profit adjusted (millions of euros) (A)		3,215		2,430		2,492
Profit from discontinued operations (net of non-controlling interest) (B)		-		-		-
Denominator for basic earnings per share (number of shares outstanding)
Weighted average number of shares outstanding (2)		6,468		6,290		5,908
Weighted average number of shares outstanding x corrective factor (3)		6,468		6,517		6,278
Adjusted number of shares - Basic earning per share (C)		6,468		6,517		6,278
Adjusted number of shares - diluted earning per share (D)		6,468		6,517		6,278
Earnings per share		0.50		0.37		0.40
Basic earnings per share from continued operations (Euros per share)A-B/C		0.50		0.37		0.40
Diluted earnings per share from continued operations (Euros per share)A-B/D		0.50		0.37		0.40
Basic earnings per share from discontinued operations (Euros per share)B/C		-		-		-
Diluted earnings per share from discontinued operations (Euros per share)B/D		-		-		-

(1) Remuneration in the period related to contingent convertible securities, recognized in equity (see Note 22.3).

(2) Weighted average number of shares outstanding (millions of euros), excluded weighted average of treasury shares during the period.

(3) Corrective factor, due to the capital increase with pre-emptive subscription right, applied for the previous years.

(*) Data recalculated due to the mentioned corrective factor.

As of December 31, 2016, 2015 and 2014, there were no other financial instruments or share options awarded to employees that could potentially affect the calculation of the diluted earnings per share for the years presented. For this reason, basic and diluted earnings per share are the same for both dates.

6. Operating segment reporting

The information about operating segments is provided in accordance with IFRS 8. Operating segment reporting represents a basic tool in the oversight and management of the BBVA Group’s various activities. The BBVA Group compiles reporting information on disaggregated business activities. These business activities are then aggregated in accordance with the organizational structure determined by the BBVA Group management into operating segments and, ultimately, the reportable segments themselves.

During 2016, there have not been significant changes in the reporting structure of the operating segments of the BBVA Group compared to the structure existing at the end of 2015. The structure of the operating segment is as follows:

· Banking activity in Spain

Includes, as in previous years, the Retail Network in Spain, Corporate and Business Banking (CBB), Corporate & Investment Banking (CIB), BBVA Seguros and Asset Management units in Spain. It also includes the portfolios, finance and structural interest-rate positions of the euro balance sheet.

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· Real estate activity in Spain

Covers specialist management of real-estate assets in the country (excluding buildings for own use), including: foreclosed real-estate assets from residential mortgages and developers; as well as lending to developers.

· The United States

Includes the Group´s business activity in the country through the BBVA Compass group and the BBVA New York branch.

· Turkey

Includes the activity of the Garanti Group.

· Mexico

Includes all the banking, real-estate and insurance businesses in the country.

· South America

Basically includes BBVA´s banking and insurance businesses in the region.

· Rest of Eurasia

Includes business activity in the rest of Europe and Asia, i.e. the Group´s retail and wholesale businesses in the area.

Lastly, the Corporate Center comprised of the rest of the items that have not been allocated to the operating segments. It includes: the costs of the head offices that have a corporate function; management of structural exchange-rate positions; specific issues of capital instruments to ensure adequate management of the Group’s global solvency; portfolios and their corresponding results, whose management is not linked to customer relations, such as industrial holdings; certain tax assets and liabilities; funds due to commitments with employees; goodwill and other intangibles. It also comprises the result from certain corporate operations.

The breakdown of the BBVA Group’s total assets by operating segments as of December 31, 2016, 2015 and 2014 is as follows:

	Millions of Euros
Total Assets by Operating Segments	2016		2015 (1)		2014 (1)
Banking Activity in Spain		332,642		339,775		318,431
Real Estate Activity in Spain		13,713		17,122		17,168
United States		88,902		86,454		69,261
Turkey (2)		84,866		89,003		22,342
Mexico		93,318		99,594		93,874
South America		77,918		70,661		84,364
Rest of Eurasia		18,980		23,469		22,325
Subtotal Assets by Operating Segments		710,339		726,079		627,765
Corporate Center and other adjustments (3)		21,517		23,776		4,108
Total Assets BBVA Group		731,856		749,855		631,942

⁽¹⁾  The figures corresponding to 2015 and 2014 have been restated in order to allow homogenous comparisons due to changes in the scope and immaterial adjustments of operating segments.

⁽²⁾  The information is presented under management criteria, pursuant to which Garanti’s information has been proportionally integrated based on our 25.01% interest in Garanti. After the agreement Garanti Group begins to consolidate.

⁽³⁾  Other adjustments include adjustments made to account for the fact that, in our Consolidated Financial Statements, Garanti is accounted for using the equity method until the additional acquisition of 14.89% rather than using the management criteria referred above.

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The attributable profit and main earning figures in the consolidated income statements for the six months period ended December 31, 2016, 2015 and 2014 by operating segments are as follows:

								Millions of Euros
								Operating Segments
Main Margins and Profits by Operating Segments	BBVA Group		Spain		Real Estate Activity in Spain			United Sates		Turkey		Mexico		South America		Rest of Eurasia		Corporate Center			Adjustments (3)
2016
Net interest income		17,059		3,883		60			1,953		3,404		5,126		2,930		166		(461	)		-
Gross income		24,653		6,445		(6	)		2,706		4,257		6,766		4,054		491		(60	)		-
Net operating income (2)		11,862		2,846		(130	)		863		2,519		4,371		2,160		149		(916	)		-
Operating profit /(loss) before tax		6,392		1,278		(743	)		612		1,906		2,678		1,552		203		(1,094	)		-
Profit		3,475		912		(595	)		459		599		1,980		771		151		(801	)		-
2015 (1)
Net interest income		16,022		4,001		71			1,811		2,194		5,387		3,202		183		(424	)		(404	)
Gross income		23,362		6,804		(28	)		2,631		2,434		7,081		4,477		473		(192	)		(318	)
Net operating income (2)		11,254		3,358		(154	)		825		1,273		4,459		2,498		121		(1,017	)		(109	)
Operating profit /(loss) before tax		4,603		1,548		(716	)		685		853		2,772		1,814		111		(1,187	)		(1,276	)
Profit		2,642		1,085		(496	)		517		371		2,094		905		75		(1,910	)		-
2014 (1)
Net interest income		14,382		3,830		(34	)		1,443		735		4,906		4,699		189		(651	)		(734	)
Gross income		20,725		6,621		(211	)		2,137		944		6,513		5,191		736		(575	)		(632	)
Net operating income (2)		10,166		3,585		(357	)		640		550		4,100		2,875		393		(1,380	)		(240	)
Operating profit /(loss) before tax		3,980		1,272		(1,275	)		561		392		2,508		1,951		320		(1,666	)		(83	)
Profit		2,618		894		(889	)		428		310		1,903		1,001		255		(1,285	)		-

⁽¹⁾  The figures corresponding to 2015 and 2014 have been restated in order to allow homogenous comparisons due to changes in the scope of operating segments (see Note 1.3).

⁽²⁾  Gross Income less Administrative Cost and Amortization.

⁽³⁾  From the third quarter of 2015, BBVA consolidated Garanti (39.9% owned). In prior periods, Garanti’s revenues and costs are reflected in our segment information only in the proportion of BBVA´s ownership (25.01%). This column includes adjustments resulting from the accounting of the investment in Garanti group using the equity method (versus reflecting the revenues and costs of Garanti only in proportion of BBVA´s ownership Garanti as stated in the management information). This column also includes inter-segment adjustments (see Note 2).

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7. Risk management

7.1	General risk management and control model	F-49
7.1.1	Governance and organization	F-49
7.1.2	Risk appetite framework	F-52
7.1.3	Decisions and processes	F-54
7.1.4	Assessment, monitoring and reporting	F-55
7.1.5	Infrastructure	F-55
7.1.6	Risk culture	F-56
7.2	Risk factors	F-56
7.3	Credit risk	F-58
7.3.1	Credit risk exposure	F-59
7.3.2	Mitigation of credit risk, collateralized credit risk and other credit enhancements	F-62
7.3.3	Credit quality of financial assets that are neither past due nor impaired	F-62
7.3.4	Past due but not impaired and impaired secured loans risks	F-65
7.3.5	Impairment losses	F-69
7.3.6	Refinancing and restructuring operations	F-72
7.4	Market risk	F-73
7.4.1	Market risk portfolios	F-73
7.4.2	Structural risk	F-78
7.4.3	Financial Instruments compensation	F-80
7.5	Liquidity risk	F-81
7.5.1	Liquidity risk management	F-81
7.5.2	Asset encumbrance	F-85
7.6	Operational Risk	F-87
7.7	Risk concentration	F-88

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7.1 General risk management and control model

The BBVA Group has an overall risk management and control model (hereinafter ‘the model’) tailored to their individual business, their organization and the geographies in which they operate, allowing them to develop their activity in accordance with their strategy and policy control and risk management defined by the governing bodies of the Bank and adapt to a changing economic and regulatory environment, tackling risk management globally and adapted to the circumstances of each instance. The model establishes a system of appropriate risk management regarding risk profile and strategy of the Group.

This model is applied comprehensively in the Group and consists of the basic elements listed below:

· Governance and organization.

· Risk appetite framework.

· Decisions and processes.

· Assessment, monitoring and reporting.

· Infrastructure.

The Group encourages the development of a risk culture to ensure consistent application of the control and risk management Model in the Group, and to ensure that the risk function is understood and assimilated at all levels of the organization.

7.1.1 Governance and organization

The governance model for risk management at BBVA is characterized by a special involvement of its corporate bodies, both in setting the risk strategy and in the ongoing monitoring and supervision of its implementation.

Thus, as developed below, the corporate bodies are the ones that approve this risk strategy and corporate policies for the different types of risk, being the risk function responsible for the management, its implementation and development, reporting to the governing bodies.

The responsibility for the daily management of the risks lies on the businesses which abide in the development of their activity to the policies, standards, procedures, infrastructure and controls, based on the framework set by the governing bodies, which are defined by the function risk.

To perform this task properly, the risk function in the BBVA Group is configured as a single, comprehensive and independent role of commercial areas.

Corporate governance system

BBVA Group has developed a corporate governance system that is in line with the best international practices and adapted to the requirements of the regulators in the countries in which its various business units operate.

The Board of Directors (hereinafter also referred to as “the Board”) approves the risk strategy and oversees the internal management and control systems. Specifically, in relation to the risk strategy, the Board approves the Group’s risk appetite statement, the core metrics (and their statements) and the main metrics by type of risk (and their statements), as well as the general risk management and control model.

The Board of Directors is also responsible for approving and monitoring the strategic and business plan, the annual budgets and management goals, as well as the investment and funding policy, in a consistent way and in line with the approved Risk Appetite Framework. For this reason, the processes for defining the Risk Appetite Framework proposals and strategic and budgetary planning at Group level are coordinated by the executive area for submission to the Board.

With the aim of ensuring the integration of the Risk Appetite Framework into management, on the basis established by the Board of Directors, the Executive Committee approves the metrics by type of risk in relation to concentration, profitability and reputational risk and the Group’s basic structure of limits at geographical area, risk type, asset type and portfolio level. This Committee also approves specific corporate policies for each type of risk.

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Lastly, the Board has set up a Board committee focus in risks, the Risk Committee, that assists the Board and the Executive Committee in determining the Group’s risk strategy and the risk limits and policies, respectively, analyzing and assessing beforehand the proposals submitted to those bodies. The amendment of the Group’s risk strategy and of its elements is the exclusive power of the BBVA Board of Directors, while the Executive Committee is responsible for amending the metrics by type of risk within its scope of decision and the Group’s basic structure of limits, when applicable. In both cases, the amendments follow the same decision-making process described above, so the proposals for amendment are submitted by the Chief Risk Officer (“CRO”) and later analyzed, first by the Risks Committee, for later submission to the Board of Directors or to the Executive Committee, as appropriate.

Moreover, the Risks Committee, the Executive Committee and the Board itself conduct proper monitoring of the risk strategy implementation and of the Group’s risk profile. The risks function regularly reports on the development of the Group’s Risk Appetite Framework metrics to the Board and to the Executive Committee, after their analysis by the Risks Committee, whose role in this monitoring and control work is particularly relevant.

The head of the risk function in the executive hierarchy is the Group’s CRO, who carries out its functions with independence, authority, rank, experience, knowledge and resources to do so. He is appointed by the Board of the Bank as a member of its Senior Management, and has direct access to its corporate bodies (Board, Executive Standing Committee and Risk Committee), who reports regularly on the status of risks to the Group.

The CRO, for the utmost performance of its functions, is supported by a cross composed set of units in corporate risk and the specific risk units in the geographical and / or business areas of the Group structure. Each of these units is headed by a Risk Officer for the geographical and/or business area who, within his/her field of competence, carries out risk management and control functions and is responsible for applying the corporate policies and rules approved at Group level in a consistent manner, adapting them if necessary to local requirements and reporting to the local corporate bodies.

The Risk Officers of the geographical and/or business areas report both to the Group’s CRO and to the head of their geographical and/or business area. This dual reporting system aims to ensure that the local risk management function is independent from the operating functions and that it is aligned with the Group’s corporate risk policies and goals.

Organizational structure and committees

The risk management function, as defined above, consists of risk units from the corporate area, which carry out cross-cutting functions, and risk units from the geographical and/or business areas.

· The corporate area’s risk units develop and present the Group’s risk appetite proposal, corporate policies, rules and global procedures and infrastructures to the CRO, within the action framework approved by the corporate bodies, ensure their application, and report either directly or through the CRO to the Bank’s corporate bodies. Their functions include

– Management of the different types of risks at Group level in accordance with the strategy defined by the corporate bodies.

– Risk planning aligned with the risk appetite framework principles defined by the Group.

– Monitoring and control of the Group’s risk profile in relation to the risk appetite framework approved by the Bank’s corporate bodies, providing accurate and reliable information with the required frequency and in the necessary format.

– Prospective analyses to enable an evaluation of compliance with the risk appetite framework in stress scenarios and the analysis of risk mitigation mechanisms.

– Management of the technological and methodological developments required for implementing the Model in the Group.

– Design of the Group’s Internal Control model and definition of the methodology, corporate criteria and procedures for identifying and prioritizing the risk inherent in each unit’s activities and processes.

– Validation of the models used and the results obtained by them in order to verify their adaptation to the different uses to which they are applied.

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· The risk units in the business units develop and present to the Risk Officer of the geographical and/or business area the risk appetite framework proposal applicable in each geographical and/or business area, independently and always within the Group’s strategy/risk appetite framework. They also ensure that the corporate policies and rules approved consistently at a Group level are applied, adapting them if necessary to local requirements; they are provided with appropriate infrastructures for management and control of their risks, within the global risk infrastructure framework defined by the corporate areas; and they report to their corporate bodies and/or to senior management, as appropriate.

The local risk units thus work with the corporate area risk units in order to adapt to the risk strategy at Group level and share all the information necessary for monitoring the development of their risks.

The risk function has a decision-making process to perform its functions, underpinned by a structure of committees, where the Global Risk Management Committee (GRMC) acts as the highest committee within Risk. It proposes, examines and, where applicable, approves, among others, the internal risk regulatory framework and the procedures and infrastructures needed to identify, assess, measure and manage the material risks faced by the Group in its businesses, the determination of risk limits by portfolio or counterparty; and the admission of the operations involving the most relevant risks. The members of this Committee are the Group’s CRO and the heads of the risk units of the corporate area and of the most representative geographical and/or business areas.

The GRMC carries out its functions assisted by various support committees which include:

· Global Technical Operations Committee: It is responsible for analyzing and decision-making related to wholesale credit risk admission in certain customer segments.

· Monitoring, Assessment & Reporting Committee: It guarantees and ensures the appropriate development of aspects related to risk identification, assessment, monitoring and reporting, with an integrated and cross-cutting vision.

· Asset Allocation Committee: The executive body responsible for analysis and decision-making on all credit risk matters related to the processes intended for obtaining a balance between risk and return.

· Technology & Analytics Committee: It ensures an appropriate decision-making process regarding the development, implementation and use of the tools and models required to achieve an appropriate management of those risks to which the BBVA Group is exposed.

· Corporate Technological Risks and Operational Control Committee: It approves the Technological Risks and Operational Control Management Frameworks in accordance with the General Risk Management Model’s architecture and monitors metrics, risk profiles and operational loss events.

· Global Markets Risk Unit Global Committee: It is responsible for formalizing, supervising and communicating the monitoring of trading desk risk in all the Global Markets business units, as well as coordinating and approving GMRU key decisions activity, and developing and proposing to GRMC the corporate regulation of the unit.

· Corporate Operational and Outsourcing Risk Admission Committee: It identifies and assesses the operational risks of new businesses, new products and services, and outsourcing initiatives.

· Retail Risk Committee: It ensures the alignment of the practices and processes of the retail credit risk cycle with the approved risk tolerance and with the business growth and development objectives established in the corporate strategy of the Group

Each geographical and/or business area has its own risk management committee (or committees), with objectives and contents similar to those of the corporate area, which perform their duties consistently and in line with corporate risk policies and rules.

Under this organizational scheme, the risk management function ensures the risk strategy, the regulatory framework, and standardized risk infrastructures and controls are integrated and applied across the entire Group. It also benefits from the knowledge and proximity to customers in each geographical and/or business area, and transmits the corporate risk culture to the Group’s different levels. Moreover, this organization enables the risks function to conduct and report to the corporate bodies integrated monitoring and control of the entire Group’s risks.

Internal Risk Control and Internal Validation

The Group has a specific Internal Risk Control unit whose main function is to ensure there is an adequate internal regulatory framework in place, together with a process and measures defined for each type of risk identified in the Group, (and for other types of risk that could potentially affect the Group, to oversee their application and operation, and to ensure that the risk strategy is integrated into the Group’s management. The Internal Risk

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Control unit verifies the performance of their duties by the units that develop the risk models, manage the processes and execute the controls. Its scope is global both geographically and in terms of type of risk.

The Director of Group Internal Control Risk is responsible for the function, and reports its activities and work plans to the CRO and the Risk Committee of the Board, besides attending to it on issues deemed necessary.

For these purposes the Internal Risks Control department has a Technical Secretary’s Office, which offers the Committee the technical support it needs to better perform its duties.

The unit has a structure of teams at both corporate level and in the most relevant geographical areas in which the Group operates. As in the case of the corporate area, local units are independent of the business areas that execute the processes, and of the units that execute the controls. They report functionally to the Internal Risk Control unit. This unit’s lines of action are established at Group level, and it is responsible for adapting and executing them locally, as well as for reporting the most relevant aspects.

Additionally, the Group has an Internal Validation unit, which reviews the performance of its duties by the units that develop risk models and of those who use them to manage. Its functions include, among others, review and independent validation, internally, of the models used for the control and management of the Group’s risks.

7.1.2 Risk appetite framework

The Group’s risk appetite framework, approved by the Board, determines the risks (and their level) that the Group is willing to assume to achieve its business objectives considering an organic evolution of its business. These are expressed in terms of solvency, liquidity and funding profitability, recurrent earnings, cost of risk or other metrics, which are reviewed periodically as well as in case of material changes to the entity’s business or relevant corporate transactions. The definition of the risk appetite has the following goals:

· To express the maximum levels of risk it is willing to assume, at both Group and geographical and/or business area level.

· To establish a set of guidelines for action and a management framework for the medium and long term that prevent actions from being taken (at both Group and geographical and/or business area level) that could compromise the future viability of the Group.

· To establish a framework for relations with the geographical and/or business areas that, while preserving their decision-making autonomy, ensures they act consistently, avoiding uneven behavior.

· To establish a common language throughout the organization and develop a compliance-oriented risk culture.

· Alignment with the new regulatory requirements, facilitating communication with regulators, investors and other stakeholders, thanks to an integrated and stable risk management framework.

Risk appetite framework is expressed through the following elements:

Risk appetite statement

Sets out the general principles of the Group’s risk strategy and the target risk profile. The Group’s Risk appetite statement is:

BBVA Group’s risk policy is designed to achieve a moderate risk profile for the entity, through: prudent management and a responsible universal banking business model targeted to value creation, risk-adjusted return and recurrence of results; diversified by geography, asset class, portfolio and clients; and with presence in emerging and developed countries, maintaining a medium/low risk profile in every country, and focusing on a long term relationship with the client.

Core metrics and statements

Based on the risk appetite statement, statements are established to set down the general risk management principles in terms of solvency, profitability, liquidity and funding.

· Solvency: a sound capital position, maintaining resilient capital buffer from regulatory and internal requirements that supports the regular development of banking activity even under stress situations. As a result, BBVA proactively manages its capital position, which is tested under different stress scenarios from a regular basis.

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· Liquidity and funding: A sound balance-sheet structure to sustain the business model. Maintenance of an adequate volume of stable resources, a diversified wholesale funding structure, which limits the weight of short term funding and ensures the access to the different funding markets, optimizing the costs and preserving a cushion of liquid assets to overcome a liquidity survival period under stress scenarios.

· Income recurrence and profitability: A sound margin-generation capacity supported by a recurrent business model based on the diversification of assets, a stable funding and a customer focus; combined with a moderate risk profile that limits the credit losses even under stress situations; all focused on allowing income stability and maximizing the risk-adjusted profitability.

In addition, the core metrics define, in quantitative terms, the principles and the target risk profile set out in the risk appetite statement and are in line with the strategy of the Group. Each metric have three thresholds (traffic-light approach) ranging from a standard business management to higher deterioration levels: Management reference, Maximum appetite and Maximum capacity. The Group’s Core metrics are:

By type of risk metrics and statements

Based on the core metrics, statements are established for each type of risk reflecting the main principles governing the management of that risk and several metrics are calibrated, compliance with which enables compliance with the core metrics and the statement of the Group. By type of risk metrics define the strategic positioning per type of risk and have a maximum appetite level.

Basic limits structure (core limits)

The purpose of the basic limits structure or core limits is to manage risks on an ongoing basis within the thresholds tolerated by core and “by type of risk” metrics; so they are a breakdown by geography and portfolio of the same metrics or complementary metrics.

In addition to this framework, there’s a Management limits level that is defined and managed by the Risk Area developing the core limits, in order to ensure that the early management of risks by subcategories or by subportfolios complies with that core limits and, in general, with the risk appetite framework.

The following graphic summarizes the structure of BBVA’s Risk appetite framework:

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The corporate risk area works with the various geographical and/or business areas to define their risk appetite framework, which will be coordinated with and integrated into the Group’s risk appetite to ensure that its profile fits as defined.

The risk appetite framework defined by the Group expresses the levels and types of risk that the Bank is willing to assume to be able to implement its strategic plan with no relevant deviations, even in situations of stress. The risk appetite framework is integrated in the management and determines the basic lines of activity of the Group, because it sets the framework within the budget is developed.

During 2016, the Risk Appetite metrics evolved in line with the set profile.

7.1.3 Decisions and processes

The transfer of risk appetite framework to ordinary management is supported by three basic aspects:

· A standardized set of regulations

· Risk planning

· Comprehensive management of risks over their life cycle

Standardized regulatory framework

The corporate GRM area is responsible for proposing the definition and development of the corporate policies, specific rules, procedures and schemes of delegation based on which risk decisions should be taken within the Group.

This process aims for the following objectives:

· Hierarchy and structure: well-structured information through a clear and simple hierarchy creating relations between documents that depend on each other.

· Simplicity: an appropriate and sufficient number of documents.

· Standardization: a standardized name and content of document.

· Accessibility: ability to search for, and easy access to, documentation through the corporate risk management library.

The approval of corporate policies for all types of risks corresponds to the corporate bodies of the Bank, while the corporate risk area endorses the remaining regulations.

Risk units of geographical and / or business areas continue to adapt to local requirements the regulatory framework for the purpose of having a decision process that is appropriate at local level and aligned with the Group policies. If such adaptation is necessary, the local risk area must inform the corporate GRM area, which must ensure the consistency of the set of regulations at the level of the entire Group, and thus must give its approval prior to any modifications proposed by the local risk areas.

Risk planning

Risk planning ensures that the risk appetite framework is integrated into management through a cascade process for establishing limits and profitability adjusted to the risk profile, in which the function of the corporate area risk units and the geographical and/or business areas is to guarantee the alignment of this process against the Group’s risk appetite framework in terms of solvency, profitability, liquidity and funding.

It has tools in place that allow the risk appetite framework defined at aggregate level to be assigned and monitored by business areas, legal entities, types of risk, concentrations and any other level considered necessary.

The risk planning process is present within the rest of the Group’s planning framework so as to ensure consistency among all of them.

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Daily risk management

All risks must be managed comprehensively during their life cycle, and be treated differently depending on the type.

The risk management cycle is composed of 5 elements:

· Planning: with the aim of ensuring that the Group’s activities are consistent with the target risk profile and guaranteeing solvency in the development of the strategy.

· Assessment: a process focused on identifying all the risks inherent to the activities carried out by the Group.

· Formalization: includes the risk origination, approval and formalization stages.

· Monitoring and reporting: continuous and structured monitoring of risks and preparation of reports for internal and/or external (market, investors, etc.) consumption.

· Active portfolio management: focused on identifying business opportunities in existing portfolios and new markets, businesses and products.

7.1.4 Assessment, monitoring and reporting

Assessment, monitoring and reporting is a cross-cutting element that should ensure that the Model has a dynamic and proactive vision to enable compliance with the risk appetite framework approved by the corporate bodies, even in adverse scenarios. The materialization of this process has the following objectives:

· Assess compliance with the risk appetite framework at the present time, through monitoring of the core metrics, metrics by type of risk and the basic structure of limits.

· Assess compliance with the risk appetite framework in the future, through the projection of the risk appetite framework variables, in both a baseline scenario determined by the budget and a risk scenario determined by the stress tests.

· Identify and assess the risk factors and scenarios that could compromise compliance with the risk appetite framework, through the development of a risk repository and an analysis of the impact of those risks.

· Act to mitigate the impact in the Group of the identified risk factors and scenarios, ensuring this impact remains within the target risk profile.

· Supervise the key variables that are not a direct part of the risk appetite framework, but that condition its compliance. These can be either external or internal.

This process is integrated in the activity of the risk units, both of the corporate area and in the business units, and it is carried out during the following phases:

· Identification of risk factors, aimed at generating a map with the most relevant risk factors that can compromise the Group’s performance in relation to the thresholds defined in the risk appetite framework.

· Impact evaluation. This involves evaluating the impact that the materialization of one (or more) of the risk factors identified in the previous phase could have on the risk appetite framework metrics, through the occurrence of a given scenario.

· Response to undesired situations and realignment measures. Exceeding the parameters will trigger an analysis of the realignment measures to enable dynamic management of the situation, even before it occurs.

· Monitoring. The aim is to avoid losses before they occur by monitoring the Group’s current risk profile and the identified risk factors.

· Reporting. This aims to provide information on the assumed risk profile by offering accurate, complete and reliable data to the corporate bodies and to senior management, with the frequency and completeness appropriate to the nature, significance and complexity of the risks.

7.1.5 Infrastructure

The infrastructure is an element that must ensure that the Group has the human and technological resources needed for effective management and supervision of risks in order to carry out the functions set out in the Group’s risk Model and the achievement of their objectives.

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With respect to human resources, the Group’s risk function has an adequate workforce, in terms of number, skills, knowledge and experience.

With regards to technology, the Group ensures the integrity of management information systems and the provision of the infrastructure needed for supporting risk management, including tools appropriate to the needs arising from the different types of risks for their admission, management, assessment and monitoring.

The principles that govern the Group risk technology are:

· Standardization: the criteria are consistent across the Group, thus ensuring that risk handling is standardized at geographical and/or business area level.

· Integration in management: the tools incorporate the corporate risk policies and are applied in the Group’s day-to-day management.

· Automation of the main processes making up the risk management cycle.

· Appropriateness: provision of adequate information at the right time.

Through the “Risk Analytics” function, the Group has a corporate framework in place for developing the measurement techniques and models. It covers all the types of risks and the different purposes and uses a standard language for all the activities and geographical/business areas and decentralized execution to make the most of the Group’s global reach. The aim is to continually evolve the existing risk models and generate others that cover the new areas of the businesses that develop them, so as to reinforce the anticipation and proactiveness that characterize the Group’s risk function.

Also the risk units of geographical and / or business areas have sufficient means from the point of view of resources, structures and tools to develop a risk management in line with the corporate model.

7.1.6 Risk culture

BBVA considers risk culture to be an essential element for consolidating and integrating the other components of the Model. The culture transfers the implications that are involved in the Group’s activities and businesses to all the levels of the organization. The risk culture is organized through a number of levers, including the following:

· Communication: promotes the dissemination of the Model, and in particular the principles that must govern risk management in the Group, in a consistent and integrated manner across the organization, through the most appropriate channels. GRM has a number of communication channels to facilitate the transmission of information and knowledge among the various teams in the function and the Group, adapting the frequency, formats and recipients based on the proposed goal, in order to strengthen the basic principles of the risk function. The risk culture and the management model thus emanate from the Group’s corporate bodies and senior management and are transmitted throughout the organization.

· Training: its main aim is to disseminate and establish the model of risk management across the organization, ensuring standards in the skills and knowledge of the different persons involved in the risk management processes.

Well defined and implemented training ensures continuous improvement of the skills and knowledge of the Group’s professionals, and in particular of the GRM area, and is based on four aspects that aim to develop each of the needs of the GRM group by increasing its knowledge and skills in different fields such as: finance and risks, tools and technology, management and skills, and languages.

· Motivation: the aim in this area is for the incentives of the risk function teams to support the strategy for managing those teams and the function’s values and culture at all levels. Includes compensation and all those elements related to motivation – working environment, etc. which contribute to the achievement Model objectives.

7.2 Risk factors

As mentioned earlier, BBVA has processes in place for identifying risks and analyzing scenarios that enable the Group to manage risks in a dynamic and proactive way.

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The risk identification processes are forward looking to ensure the identification of emerging risks and take into account the concerns of both the business areas, which are close to the reality of the different geographical areas, and the corporate areas and senior management.

Risks are captured and measured consistently using the methodologies deemed appropriate in each case. Their measurement includes the design and application of scenario analyses and stress testing and considers the controls to which the risks are subjected.

As part of this process, a forward projection of the risk appetite framework variables in stress scenarios is conducted in order to identify possible deviations from the established thresholds. If any such deviations are detected, appropriate measures are taken to keep the variables within the target risk profile.

To this extent, there are a number of emerging risks that could affect the Group’s business trends. These risks are described in the following main blocks:

· Macroeconomic and geopolitical risks

According to the latest information available, global growth remains stable at approximately 3% year-on- year. Throughout the year there was an increase in the dynamism of global trade, the manufacturing cycle and the confidence indicators, due to lax monetary conditions, fiscal policies that, although not expansive, are also not cyclical, moderate raw material prices, especially oil prices (which favors the demand of importing economies) and the gradual reduction of the accumulated private leverage excess in developed economies. All of this would favor a slight improvement in global growth in 2017.

The risks of this scenario are compounded by:

– increasing vulnerabilities in China caused by the accumulation of corporate debt;

– uncertainty about the effective implementation of Great Britain’s UE exit process;

– uncertainty arising from the potential increase in trade protectionism. All this in a complex geopolitical environment

The remaining events that make up the uncertainties for 2017, which could affect the valuation of the Group’s holdings in certain countries:

– Upward inflationary pressure and downward pressure on Mexico’s growth. The Central Bank of Mexico (Banxico) has continued the interest rate increases since the end of 2015, around 50 basis points per quarter, to 5.75% in December. Next steps are likely to go in the same direction to counteract upward inflationary pressure and expectations against the depreciation of the Mexican peso (in 2016, -13.1% year-on-year depreciation against the euro). This behavior results from the deterioration of Mexico’s growth expectations, assuming a less favorable framework for trade relations with the United States.

– In terms of geopolitical tensions in some geographies, it is noteworthy the uncertainty following the attempt of coup d’etat last July in Turkey, which together with the tightening of global financing conditions favors an intense slowdown in economic growth.

In this regard, the Group’s geographical diversification is a key element in achieving a high level of revenue recurrence, despite the environmental conditions and economic cycles of the economies in which it operates.

· Regulatory and reputational risks

– Financial institutions are exposed to a complex and ever-changing regulatory environment defined by governments and regulators. This can affect their ability to grow and the capacity of certain businesses to develop, and result in stricter liquidity and capital requirements with lower profitability ratios. The Group constantly monitors changes in the regulatory framework that allow for anticipation and adaptation to them in a timely manner, adopt best practices and more efficient and rigorous criteria in its implementation.

– The financial sector is under ever closer scrutiny by regulators, governments and society itself. Negative news or inappropriate behavior can significantly damage the Group’s reputation and affect its ability to develop a sustainable business. The attitudes and behaviors of the group and its members are governed by the principles of integrity, honesty, long-term vision and best practices through, inter alia, internal control Model, the Code of Conduct, tax strategy and Responsible Business Strategy of the Group.

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· Business, operational and legal risks

– New technologies and forms of customer relationships: Developments in the digital world and in information technologies pose significant challenges for financial institutions, entailing threats (new competitors, disintermediation…) but also opportunities (new framework of relations with customers, greater ability to adapt to their needs, new products and distribution channels...). Digital transformation is a priority for the Group as it aims to lead digital banking of the future as one of its objectives.

– Technological risks and security breaches: The Group is exposed to new threats such as cyber-attacks, theft of internal and customer databases, fraud in payment systems, etc. that require major investments in security from both the technological and human point of view. The Group gives great importance to the active operational and technological risk management and control. One example was the early adoption of advanced models for management of these risks (AMA - Advanced Measurement Approach).

– The financial sector is exposed to increasing litigation, so the financial institutions face a large number of proceedings which economic consequences are difficult to determine. The Group manages and monitors these proceedings to defend its interests, where necessary allocating the corresponding provisions to cover them, following the expert criteria of internal lawyers and external attorneys responsible for the legal handling of the procedures, in accordance with applicable legislation.

7.3 Credit risk

Credit risk arises from the probability that one party to a financial instrument will fail to meet its contractual obligations for reasons of insolvency or inability to pay and cause a financial loss for the other party.

It is the most important risk for the Group and includes counterparty risk, issuer risk, settlement risk and country risk management.

The principles underpinning credit risk management in BBVA are as follows:

· Availability of basic information for the study and proposal of risk, and supporting documentation for approval, which sets out the conditions required by the internal relevant body.

· Sufficient generation of funds and asset solvency of the customer to assume principal and interest repayments of loans owed.

· Establishment of adequate and sufficient guarantees that allow effective recovery of the operation, this being considered a secondary and exceptional method of recovery when the first has failed.

Credit risk management in the Group has an integrated structure for all its functions, allowing decisions to be taken objectively and independently throughout the life cycle of the risk.

· At Group level: frameworks for action and standard rules of conduct are defined for handling risk, specifically, the circuits, procedures, structure and supervision.

· At the business area level: they are responsible for adapting the Group’s criteria to the local realities of each geographical area and for direct management of risk according to the decision-making circuit:

– Retail risks: in general, the decisions are formalized according to the scoring tools, within the general framework for action of each business area with regard to risks. The changes in weighting and variables of these tools must be validated by the corporate GRM area.

– Wholesale risks: in general, the decisions are formalized by each business area within its general framework for action with regard to risks, which incorporates the delegation rule and the Group’s corporate policies.

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7.3.1 Credit risk exposure

In accordance with IFRS 7, “Financial Instruments: Disclosures” the BBVA Group’s maximum credit risk exposure (see definition below) by headings in the balance sheets as of December 31, 2016, 2015 and 2014 is provided below. It does not consider the availability of collateral or other credit enhancements to guarantee compliance with payment obligations. The details are broken down by financial instruments and counterparties.

		Millions of Euros
Maximum Credit Risk Exposure	Notes	2016		2015		2014
Financial assets held for trading	10		31,995		37,424		39,028
Debt securities			27,166		32,825		33,883
Government			24,165		29,454		28,212
Credit institutions			1,652		1,765		3,048
Other sectors			1,349		1,606		2,623
Equity instruments			4,675		4,534		5,017
Customer lending			154		65		128
Other financial assets designated at fair value through profit or loss	11		2,062		2,311		2,761
Loans and advances to credit institutions			-		62		-
Debt securities			142		173		737
Government			84		132		141
Credit institutions			47		29		16
Other sectors			11		11		580
Equity instruments			1,920		2,075		2,024
Available-for-sale financial assets	12		79,553		113,710		95,049
Debt securities			74,739		108,448		87,679
Government			55,047		81,579		63,764
Credit institutions			5,011		8,069		7,377
Other sectors			14,682		18,800		16,538
Equity instruments			4,814		5,262		7,370
Loans and receivables			482,011		490,580		390,362
Loans and advances to central banks	13.1		8,894		17,830		5,429
Loans and advances to credit institutions	13.1		31,416		29,368		25,371
Loans and advances to customers	13.2		430,474		432,856		352,900
Government			34,873		38,611		37,113
Agriculture			4,312		4,315		4,348
Industry			57,072		56,913		37,580
Real estate and construction			37,002		38,964		33,152
Trade and finance			47,045		43,576		43,880
Loans to individuals			192,281		194,288		158,586
Other			57,889		56,188		38,242
Debt securities	13.3		11,226		10,526		6,663
Government			4,709		3,275		5,608
Credit institutions			37		125		81
Other sectors			6,481		7,126		975
Held-to-maturity investments	14		17,710		-		-
Government			16,049		-		-
Credit institutions			1,515		-		-
Other sectors			146		-		-
Derivatives (trading and hedging)			54,122		49,350		47,248
Total Financial Assets Risk			667,454		693,375		574,448
Loan commitments given			107,254		123,620		96,714
Financial guarantees given			18,267		19,176		14,398
Other Commitments given			42,592		42,813		28,881
Total Loan commitments and financial guarantees	33		168,113		185,609		139,993
Total Maximum Credit Exposure			835,567		878,984		714,441

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The maximum credit exposure presented in the table above is determined by type of financial asset as explained below:

· In the case of financial assets recognized in the consolidated balance sheets, exposure to credit risk is considered equal to its carrying amount (not including impairment losses), with the sole exception of derivatives and hedging derivatives.

· The maximum credit risk exposure on financial guarantees granted is the maximum that the Group would be liable for if these guarantees were called in, and that is their carrying amount.

· Our calculation of risk exposure for derivatives is based on the sum of two factors: the derivatives fair value and their potential risk (or “add-on”).

– The first factor, fair value, reflects the difference between original commitments and fair values on the reporting date (mark-to-market). As indicated in Note 2.2.1, derivatives are accounted for as of each reporting date at fair value in accordance with IAS 39.

– The second factor, potential risk (‘add-on’), is an estimate of the maximum increase to be expected on risk exposure over a derivative fair value (at a given statistical confidence level) as a result of future changes in the fair value over the remaining term of the derivatives.

The consideration of the potential risk (“add-on”) relates the risk exposure to the exposure level at the time of a customer’s default. The exposure level will depend on the customer’s credit quality and the type of transaction with such customer. Given the fact that default is an uncertain event which might occur any time during the life of a contract, the BBVA Group has to consider not only the credit exposure of the derivatives on the reporting date, but also the potential changes in exposure during the life of the contract. This is especially important for derivatives, whose valuation changes substantially throughout their terms, depending on the fluctuation of market prices.

The breakdown by counterparty and product of loans and advances, net of impairment losses, classified in the different headings of the assets, as of December 31, 2016 and 2015 is shown below:

F-60

	Millions of euros
December 2016	Central banks		General governments		Credit institutions		Other financial    corporations		Non-financial   corporations		Households		Total
On demand and short notice		-		373		-		246		8,125		2,507		11,251
Credit card debt		-		1		-		1		1,875		14,719		16,596
Trade receivables				2,091		-		998		20,246		418		23,753
Finance leases		-		261		-		57		8,647		477		9,442
Reverse repurchase loans		81		544		15,597		6,746		-		-		22,968
Other term loans		8,814		29,140		7,694		6,878		136,105		167,892		356,524
Advances that are not loans		-		2,410		8,083		2,082		1,194		620		14,389
Loans and advances		8,894		34,820		31,373		17,009		176,192		186,633		454,921
of which: mortgage loans [Loans collateralized by immovable property]				4,722		112		690		44,406		132,398		182,328
of which: other collateralized loans				3,700		15,191		8,164		21,863		6,061		54,979
of which: credit for consumption												44,504		44,504
of which: lending for house purchase												127,606		127,606
of which: project finance loans										19,269				19,269
	Millions of euros
December 2015	Central banks		General governments		Credit institutions		Other financial   corporations		Non-financial   corporations		Households		Total
On demand and short notice		-		783		-		38		8,356		2,050		11,228
Credit card debt		-		1		-		2		1,892		15,057		16,952
Trade receivables				3,055		-		800		19,605		411		23,871
Finance leases		-		301		-		420		7,534		1,103		9,357
Reverse repurchase loans		149		326		11,676		4,717		9		-		16,877
Other term loans		10,017		31,971		8,990		5,968		134,952		168,729		360,626
Advances that are not loans		7,664		2,108		8,713		2,261		919		863		22,528
Loans and advances		17,830		38,544		29,379		14,206		173,267		188,213		461,438
of which: mortgage loans [Loans collateralized by immovable property]				4,483		264		656		43,961		135,102		184,466
of which: other collateralized loans				3,868		12,434		6,085		22,928		6,131		51,446
of which: credit for consumption												40,906		40,906
of which: lending for house purchase												126,591		126,591
of which: project finance loans										21,141				21,141

F-61

7.3.2 Mitigation of credit risk, collateralized credit risk and other credit enhancements

In most cases, maximum credit risk exposure is reduced by collateral, credit enhancements and other actions which mitigate the Group’s exposure. The BBVA Group applies a credit risk hedging and mitigation policy deriving from a banking approach focused on relationship banking. The existence of guarantees could be a necessary but not sufficient instrument for accepting risks, as the assumption of risks by the Group requires prior evaluation of the debtor’s capacity for repayment, or that the debtor can generate sufficient resources to allow the amortization of the risk incurred under the agreed terms.

The policy of accepting risks is therefore organized into three different levels in the BBVA Group:

· Analysis of the financial risk of the operation, based on the debtor’s capacity for repayment or generation of funds;

· The constitution of guarantees that are adequate, or at any rate generally accepted, for the risk assumed, in any of the generally accepted forms: monetary, secured, personal or hedge guarantees; and finally,

· Assessment of the repayment risk (asset liquidity) of the guarantees received.

The procedures for the management and valuation of collaterals are set out in the Corporate Policies (retail and wholesale), which establish the basic principles for credit risk management, including the management of collaterals assigned in transactions with customers.

The methods used to value the collateral are in line with the best market practices and imply the use of appraisal of real-estate collateral, the market price in market securities, the trading price of shares in mutual funds, etc. All the collaterals assigned must be properly drawn up and entered in the corresponding register. They must also have the approval of the Group’s legal units.

The following is a description of the main types of collateral for each financial instrument class:

· Financial instruments held for trading: The guarantees or credit enhancements obtained directly from the issuer or counterparty are implicit in the clauses of the instrument.

· Derivatives and hedging derivatives: In derivatives, credit risk is minimized through contractual netting agreements, where positive- and negative-value derivatives with the same counterparty are offset for their net balance. There may likewise be other kinds of guarantees, depending on counterparty solvency and the nature of the transaction.

· Other financial assets designated at fair value through profit or loss and Available-for-sale financial assets: The guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument.

· Loans and receivables:

– Loans and advances to credit institutions: These usually only have the counterparty’s personal guarantee.

– Loans and advances to customers: Most of these loans and advances are backed by personal guarantees extended by the own customer. There may also be collateral to secure loans and advances to customers (such as mortgages, cash collaterals, pledged securities and other collateral), or to obtain other credit enhancements (bonds, hedging, etc.).

– Debt securities: The guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument.

Collateralized loans granted by the Group as of December 31, 2016, 2015 and 2014 excluding balances deemed impaired, is broken down in Note 13.2.

· Financial guarantees, other contingent risks and drawable by third parties: These have the counterparty’s personal guarantee.

7.3.3 Credit quality of financial assets that are neither past due nor impaired

The BBVA Group has tools (“scoring” and “rating”) that enable it to rank the credit quality of its operations and customers based on an assessment and its correspondence with the probability of default (“PD”) scales. To analyze the performance of PD, the Group has a series of tracking tools and historical databases that collect the pertinent internally generated information, which can basically be grouped together into scoring and rating models.

F-62

Scoring

Scoring is a decision-making model that contributes to both the arrangement and management of retail loans: consumer loans, mortgages, credit cards for individuals, etc. Scoring is the tool used to decide to originate a loan, what amount should be originated and what strategies can help establish the price, because it is an algorithm that sorts transactions by their credit quality. This algorithm enables the BBVA Group to assign a score to each transaction requested by a customer, on the basis of a series of objective characteristics that have statistically been shown to discriminate between the quality and risk of this type of transactions. The advantage of scoring lies in its simplicity and homogeneity: all that is needed is a series of objective data for each customer, and this data is analyzed automatically using an algorithm.

There are three types of scoring, based on the information used and on its purpose:

· Reactive scoring: measures the risk of a transaction requested by an individual using variables relating to the requested transaction and to the customer’s socio-economic data available at the time of the request. The new transaction is approved or rejected depending on the score.

· Behavioral scoring: scores transactions for a given product in an outstanding risk portfolio of the entity, enabling the credit rating to be tracked and the customer’s needs to be anticipated. It uses transaction and customer variables available internally. Specifically, variables that refer to the behavior of both the product and the customer.

· Proactive scoring: gives a score at customer level using variables related to the individual’s general behavior with the entity, and to his/her payment behavior in all the contracted products. The purpose is to track the customer’s credit quality and it is used to pre-grant new transactions.

Rating

Rating tools, as opposed to scoring tools, do not assess transactions but focus on the rating of customers instead: companies, corporations, SMEs, general governments, etc. A rating tool is an instrument that, based on a detailed financial study, helps determine a customer’s ability to meet his/her financial obligations. The final rating is usually a combination of various factors: on one hand, quantitative factors, and on the other hand, qualitative factors. It is a middle road between an individual analysis and a statistical analysis.

The main difference between ratings and scorings is that the latter are used to assess retail products, while ratings use a wholesale banking customer approach. Moreover, scorings only include objective variables, while ratings add qualitative information. And although both are based on statistical studies, adding a business view, rating tools give more weight to the business criterion compared to scoring tools.

For portfolios where the number of defaults is very low (sovereign risk, corporates, financial entities, etc.) the internal information is supplemented by “benchmarking” of the external rating agencies (Moody’s, Standard & Poor’s and Fitch). To this end, each year the PDs compiled by the rating agencies at each level of risk rating are compared, and the measurements compiled by the various agencies are mapped against those of the BBVA master rating scale.

Once the probability of default of a transaction or customer has been calculated, a “business cycle adjustment” is carried out. This is a means of establishing a measure of risk that goes beyond the time of its calculation. The aim is to capture representative information of the behavior of portfolios over a complete economic cycle. This probability is linked to the Master Rating Scale prepared by the BBVA Group to enable uniform classification of the Group’s various asset risk portfolios.

F-63

The table below shows the abridged scale used to classify the BBVA Group’s outstanding risk as of December 31, 2016:

External rating	Internal rating	Probability of default (basic points)
Standard&Poor’s List	Reduced List (22 groups)	Average		Minimum   from >=		Maximum
AAA	AAA		1		-		2
AA+	AA+		2		2		3
AA	AA		3		3		4
AA-	AA-		4		4		5
A+	A+		5		5		6
A	A		8		6		9
A-	A-		10		9		11
BBB+	BBB+		14		11		17
BBB	BBB		20		17		24
BBB-	BBB-		31		24		39
BB+	BB+		51		39		67
BB	BB		88		67		116
BB-	BB-		150		116		194
B+	B+		255		194		335
B	B		441		335		581
B-	B-		785		581		1,061
CCC+	CCC+		1,191		1,061		1,336
CCC	CCC		1,500		1,336		1,684
CCC-	CCC-		1,890		1,684		2,121
CC+	CC+		2,381		2,121		2,673
CC	CC		3,000		2,673		3,367
CC-	CC-		3,780		3,367		4,243

These different levels and their probability of default were calculated by using as a reference the rating scales and default rates provided by the external agencies Standard & Poor’s and Moody’s. These calculations establish the levels of probability of default for the BBVA Group’s Master Rating Scale. Although this scale is common to the entire Group, the calibrations (mapping scores to PD sections/Master Rating Scale levels) are carried out at tool level for each country in which the Group has tools available.

The table below outlines the distribution of exposure, including derivatives, by internal ratings, to corporates, financial entities and institutions (excluding sovereign risk), of BBVA, S.A., Bancomer, Compass and subsidiaries in Spain as of December 31, 2016 and 2015:

	December 2016					December 2015
Credit Risk Distribution by Internal Rating	Amount (Millions of  Euros)		%			Amount (Millions of  Euros)		%
AAA/AA+/AA/AA-		35,430		11.84	%		27,913		9.17	%
A+/A/A-		58,702		19.62	%		62,798		20.64	%
BBB+		43,962		14.69	%		43,432		14.27	%
BBB		27,388		9.15	%		28,612		9.40	%
BBB-		41,713		13.94	%		40,821		13.41	%
BB+		32,694		10.92	%		28,355		9.32	%
BB		19,653		6.57	%		23,008		7.56	%
BB-		13,664		4.57	%		12,548		4.12	%
B+		10,366		3.46	%		8,597		2.83	%
B		4,857		1.62	%		5,731		1.88	%
B-		3,687		1.23	%		3,998		1.31	%
CCC/CC		7,149		2.39	%		18,488		6.08	%
Total		299,264		100.00	%		304,300		100.00	%

F-64

7.3.4 Past due but not impaired and impaired secured loans risks

The table below provides details by counterpart and by product of past due risks but not considered to be impaired, as of December 31, 2016 and 2015, listed by their first past-due date; as well as the breakdown of the debt securities and loans and advances individually and collectively estimated, and the specific allowances for individually estimated and for collectively estimated (see Note 2.2.1):

F-65

Millions of Euros
December 2016	Past due but not impaired						Impaired assets		Carrying amount of the impaired assets		Specific allowances for financial assets, individually  estimated			Specific allowances for financial assets, collectively estimated			Collective allowances for incurred but not reported losses			Accumulated write-offs
	£ 30 days		> 30 days  £ 60 days		> 60 days < 90   days
Debt securities		-		-		-		272		128		(120	)		(24	)		(46	)		(1	)
Loans and advances		3,384		696		735		22,925		12,133		(3,084	)		(7,708	)		(5,224	)		(29,346	)
Central banks		-		-		-		-		-		-			-			-			-
General governments		66		-		2		295		256		(19	)		(20	)		(13	)		(13	)
Credit institutions		3		-		82		10		3		-			(7	)		(36	)		(5	)
Other financial corporations		4		7		21		34		8		(6	)		(20	)		(57	)		(6	)
Non-financial corporations		968		209		204		13,786		6,383		(2,602	)		(4,801	)		(2,789	)		(18,020	)
Households		2,343		479		426		8,801		5,483		(458	)		(2,860	)		(2,329	)		(11,303	)
TOTAL		3,384		696		735		23,197		12,261		(3,204	)		(7,733	)		(5,270	)		(29,347	)
Loans and advances by product, by collateral and by subordination
On demand (call) and short notice (current account)		79		15		29		562		249		(70	)		(243	)
Credit card debt		377		88		124		643		114		(11	)		(518	)
Trade receivables		51		15		13		424		87		(67	)		(271	)
Finance leases		188		107		59		516		252		(18	)		(246	)
Reverse repurchase loans		-		-		82		1		-		-			(1	)
Other term loans		2,685		469		407		20,765		11,429		(2,909	)		(6,427	)
Advances that are not loans		5		-		21		14		2		(10	)		(2	)
of which: mortgage loans (Loans collateralized by inmovable property)		1,202		265		254		16,526		9,008		(1,256	)		(4,594	)
of which: other collateralized loans		593		124		47		1,129		656		(93	)		(181	)
of which: credit for consumption		1,186		227		269		1,622		455		(145	)		(1,023	)
of which: lending for house purchase		883		194		105		6,094		4,546		(140	)		(1,408	)
of which: project finance loans		138		-		0		253		105		(76	)		(71	)

(*) In the appendix X there is a breakdown of loans and advances in the heading of Loans and receivables impaired by geographical areas

F-66

Millions of Euros
December 2015	Past due but not impaired						Impaired assets   (*)		Carrying amount of the impaired assets		Specific allowances for financial assets, individually estimated			Specific allowances for financial assets, collectively estimated			Collective allowances for incurred but not reported losses			Accumulated write-offs
	£ 30 days		> 30 days £ 60   days		> 60 days < 90   days
Debt securities		-		-		-		81		46		(21	)		(14	)		(113	)		-
Loans and advances		3,445		825		404		25,358		12,527		(3,830	)		(9,001	)		(5,911	)		(26,143	)
Central banks		-		-		-		-		-		-			-			-			-
General governments		154		278		2		194		157		(14	)		(23	)		(30	)		(19	)
Credit institutions		-		-		-		25		9		(11	)		(6	)		(34	)		(5	)
Other financial corporations		7		1		14		67		29		(11	)		(27	)		(124	)		(5	)
Non-financial corporations		838		148		48		16,254		7,029		(3,153	)		(6,071	)		(3,096	)		(15,372	)
Households		2,446		399		340		8,817		5,303		(641	)		(2,873	)		(2,626	)		(10,743	)
TOTAL		3,445		825		404		25,439		12,573		(3,851	)		(9,015	)		(6,024	)		(26,143	)
Loans and advances by product, by collateral and by subordination
On demand (call) and short notice (current account)		134		13		7		634		204		(106	)		(324	)
Credit card debt		389		74		126		689		161		(24	)		(503	)
Trade receivables		98		26		22		628		179		(119	)		(330	)
Finance leases		136		29		21		529		222		(31	)		(276	)
Reverse repurchase loans		1		-		-		1		1		-			(1	)
Other term loans		2,685		682		227		22,764		11,747		(3,540	)		(7,477	)
Advances that are not loans		2		-		-		113		13		(10	)		(89	)
of which: mortgage loans (Loans collateralized by inmovable property)		1,342		266		106		16,526		9,767		(1,705	)		(5,172	)
of which: other collateralized loans		589		102		27		1,129		809		(182	)		(157	)
of which: credit for consumption		957		164		220		1,543		404		(129	)		(1,010	)
of which: lending for house purchase		616		174		110		5,918		4,303		(293	)		(1,322	)
of which: project finance loans		3		-		1		276		66		(32	)		(178	)

(*) In the appendix X there is a breakdown of the impaired loans and advances by geographical areas.

F-67

The breakdown of loans and advances of loans and receivables, impaired and accumulated impairment by sectors as of December 31, 2016 and 2015 is as follows:

	Millions of Euros
December 2016	Of which: non-performing		Accumulated impairment or Accumulated changes in fair value due to credit risk			Non-performing loans and advances as a % of the total
General governments		295		(52	)		0.8	%
Credit institutions		10		(42	)		0.0	%
Other financial corporations		34		(82	)		0.2	%
Non-financial corporations		13,786		(10,192	)		7.4	%
Agriculture, forestry and fishing		221		(188	)		5.1	%
Mining and quarrying		126		(83	)		3.3	%
Manufacturing		1,569		(1,201	)		4.5	%
Electricity, gas, steam and air conditioning supply		569		(402	)		3.2	%
Water supply		29		(10	)		3.5	%
Construction		5,358		(3,162	)		26.3	%
Wholesale and retail trade		1,857		(1,418	)		6.2	%
Transport and storage		442		(501	)		4.5	%
Accommodation and food service activities		499		(273	)		5.9	%
Information and communication		112		(110	)		2.2	%
Real estate activities		1,441		(1,074	)		8.7	%
Professional, scientific and technical activities		442		(380	)		6.0	%
Administrative and support service activities		182		(107	)		7.3	%
Public administration and defense, compulsory social security		18		(25	)		3.0	%
Education		58		(31	)		5.4	%
Human health services and social work activities		89		(88	)		1.8	%
Arts, entertainment and recreation		84		(51	)		5.1	%
Other services		691		(1,088	)		4.2	%
Households		8,801		(5,648	)		4.6	%
LOANS AND ADVANCES		22,925		(16,016	)		5.0	%
	Millions of Euros
December 2015	Non-performing		Accumulated impairment or Accumulated changes in fair value due to credit risk			Non-performing loans and advances as a % of the total
General governments		194		(67	)		0.5	%
Credit institutions		25		(51	)		0.1	%
Other financial corporations		67		(162	)		0.5	%
Non-financial corporations		16,254		(12,321	)		8.8	%
Agriculture, forestry and fishing		231		(180	)		5.4	%
Mining and quarrying		192		(114	)		4.7	%
Manufacturing		1,947		(1,729	)		5.8	%
Electricity, gas, steam and air conditioning supply		250		(395	)		1.4	%
Water supply		44		(23	)		5.2	%
Construction		6,585		(4,469	)		30.1	%
Wholesale and retail trade		1,829		(1,386	)		6.3	%
Transport and storage		616		(607	)		6.4	%
Accommodation and food service activities		567		(347	)		7.0	%
Information and communication		110		(100	)		2.3	%
Real estate activities		1,547		(1,194	)		9.1	%
Professional, scientific and technical activities		944		(454	)		12.8	%
Administrative and support service activities		224		(148	)		6.9	%
Public administration and defence, compulsory social security		18		(25	)		2.8	%
Education		26		(19	)		2.6	%
Human health services and social work activities		82		(91	)		1.8	%
Arts, entertainment and recreation		100		(63	)		6.6	%
Other services		942		(977	)		6.1	%
Households		8,817		(6,140	)		4.5	%
LOANS AND ADVANCES		25,358		(18,742	)		5.5	%

F-68

The changes in 2016, 2015 and 2014 of impaired financial assets and guarantees are as follow:

	Millions of Euros
Changes in Impaired Financial Assets and Contingent Risks	2016		2015		2014
Balance at the beginning		26,103		23,234		25,978
Additions (*)		11,133		14,872		8,874
Decreases (**)		(7,633)		(6,720)		(7,172)
Net additions		3,500		8,152		1,702
Amounts written-off		(5,592)		(4,989)		(4,720)
Exchange differences and other		(134)		(295)		274
Balance at the end		23,877		26,103		23,234

(*) Includes the balance amounts attributable to Catalunya Banc upon its consolidation in April 2015 of €3,969 million and Garanti Group in July 2015 of €1,845 million.

(**) Reflects the total amount of impaired loans derecognized from the balance sheet throughout the period as a result of mortgage foreclosures and real estate assets received in lieu of payment as well as monetary recoveries (see Notes 20 and 21 to the consolidated financial statement for additional information).

The changes in 2016, 2015 and 2014 in financial assets derecognized from the accompanying consolidated balance sheet as their recovery is considered unlikely (hereinafter “write-offs”), is shown below:

	Millions of Euros
Changes in Impaired Financial Assets Written-Off from the Balance Sheet	2016		2015		2014
Balance at the beginning		26,143		23,583		20,752
Acquisition of subsidiaries in the year		-		1,362		-
Increase:		5,699		6,172		4,878
Decrease:		(2,384)		(4,830)		(2,204)
Re-financing or restructuring		(32)		(28)		(3)
Cash recovery (Note 47)		(541)		(490)		(443)
Foreclosed assets		(210)		(159)		(116)
Sales of written-off		(45)		(54)		(66)
Debt forgiveness		(864)		(3,119)		(1,231)
Time-barred debt and other causes		(692)		(980)		(345)
Net exchange differences		(111)		(144)		156
Balance at the end		29,347		26,143		23,583

As indicated in Note 2.2.1, although they have been derecognized from the consolidated balance sheet, the BBVA Group continues to attempt to collect on these written-off financial assets, until the rights to receive them are fully extinguished, either because it is time-barred financial asset, the financial asset is condoned, or other reasons.

7.3.5 Impairment losses

Below are the changes in 2016 and 2015, in the provisions recognized on the accompanying consolidated balance sheets to cover estimated impairment losses in loans and advances and debt securities, according to the different headings under which they are classified in the accompanying consolidated balance sheet:

F-69

	Millions of Euros
December 2016	Opening balance		Increases due   to amounts set aside   for estimated loan   losses during the period		Decreases due   to amounts reversed   for estimated loan   losses during the   period		Decreases due   toamounts taken   against allowances		Transfers between   allowances		Other adjustments		Closing balance		Recoveries   recorded directly to   the statement of   profit or loss
Equity instruments
Specific allowances for financial assets, individually estimated		(3,851)		(765)		351		283		749		30		(3,204)		2
Debt securities		(21)		(164)		3		64		-		(1)		(120)		-
Central banks		-		-		-		-		-		-		-		-
General governments		-		-		-		-		-		-		-		-
Credit institutions		(20)		-		-		5		-		-		(15)		-
Other financial corporations		(2)		(26)		-		26		-		-		(2)		-
Non-financial corporations		-		(138)		3		33		-		(1)		(103)		-
Loans and advances		(3,830)		(601)		348		220		749		31		(3,084)		2
Central banks		-		-		-		-		-		-		-		-
General governments		(14)		-		2		-		(6)		-		(19)		-
Credit institutions		(11)		-		-		-		10		-		-		-
Other financial corporations		(11)		(3)		1		-		6		3		(6)		-
Non-financial corporations		(3,153)		(494)		310		206		525		4		(2,602)		-
Households		(641)		(104)		35		13		214		24		(458)		2
Specific allowances for financial assets, collectively estimated		(9,015)		(6,146)		2,357		5,390		(872)		553		(7,733)		538
Debt securities		(14)		(2)		3		-		(10)		(1)		(24)		-
Central banks		-		-		-		-		-		-		-		-
General governments		-		-		-		-		-		-		-		-
Credit institutions		-		-		-		-		-		-		-		-
Other financial corporations		(14)		(2)		3		-		(10)		(1)		(24)		-
Non-financial corporations		-		-		-		-		-		-		-		-
Loans and advances		(9,001)		(6,144)		2,354		5,390		(862)		554		(7,708)		538
Central banks		-		-		-		-		-		-		-		-
General governments		(23)		(2)		18		6		(21)		2		(20)		1
Credit institutions		(6)		(2)		3		-		-		(3)		(7)		-
Other financial corporations		(27)		(31)		8		22		5		4		(20)		-
Non-financial corporations		(6,071)		(3,211)		1,848		3,051		(804)		386		(4,801)		335
Households		(2,873)		(2,898)		476		2,312		(42)		165		(2,860)		203
Collective allowances for incurred but not reported losses on financial assets		(6,024)		(1,558)		1,463		88		775		(15)		(5,270)		1
Debt securities		(113)		(11)		15		1		64		-		(46)		-
Loans and advances		(5,911)		(1,546)		1,449		87		711		(15)		(5,224)		-
Total		(18,890)		(8,470)		4,172		5,762		652		568		(16,206)		541

F-70

	Millions of euros
December 2015	Opening balance		Increases due   to amounts set aside   for estimated loan   losses during the period		Decreases due   to amounts reversed   for estimated loan   losses during the   period		Decreases due   toamounts taken   against allowances		Transfers between   allowances		Other adjustments		Closing balance		Recoveries   recorded directly to   the statement of   profit or loss
Equity instruments
Specific allowances for financial assets, individually estimated		(2,563)		(1,375)		27		384		154		(479)		(3,851)		-
Debt securities		(21)		(4)		4		-